1. Gomi Waste Disposal is planning to sell its Columbus, Memphis, and Detroit fa
ID: 2819115 • Letter: 1
Question
1. Gomi Waste Disposal is planning to sell its Columbus, Memphis, and Detroit facilities. The firm expects to sell each of the three facilities for the same, positive cash flow of W dollars. The firm expects to sell its Columbus facility in Z years, its Memphis facility in Z years, and its Detroit facility in T years. The cost of capital for the Columbus facility is Q percent, the cost of capital for the Detroit facility is Q percent, and the cost of capital for the Memphis facility is P percent. We know that T > Z > 0 and Q > P > 0. The cash flows from the sales are the only cash flows associated with the various facilities. Based on the information in the preceding paragraph, which one of the following assertions is true?
The Detroit facility is the most valuable of the 3 facilities
The Memphis facility is the most valuable of the 3 facilities
None of the other assertions is true
The Columbus facility is the most valuable of the 3 facilities
Two of the three facilities have equal value and those two facilities are more valuable than the third facility or all three facilities have the same value
2.
Litchfield Design is planning to sell its San Francisco, Chicago, and Miami stores. The firm expects to sell its Miami store for a cash flow of E dollars, its San Francisco store for a cash flow of E dollars, and its Chicago store for a cash flow of L dollars. The firm expects to sell its Miami store in P years, its San Francisco store in V years, and its Chicago store in V years. The cost of capital for all three stores is R. We know that L > E > 0, P > V > 0, and R > 0. The cash flows from the sales are the only cash flows associated with the various stores. Based on the information in the preceding paragraph, which one of the following assertions is true?
Two of the three stores have equal value and those two stores are more valuable than the third store or all three stores have the same value
None of the other assertions is true
The San Francisco store is the most valuable of the 3 stores
The Miami store is the most valuable of the 3 stores
The Chicago store is the most valuable of the 3 stores
3. Based on the information in the table, which one of the assertions is true?
Investment
Present value of expected cash flow
Expected cash flow
When expected cash flow is expected
Expected annual return
A
?
41,522 dollars
in 2 years
7.02 percent
B
?
103,647 dollars
in 9 years
12.42 percent
C
20,629 dollars
23,399 dollars
in 3 years
?
D
11,356 dollars
15,383 dollars
in 9 years
?
Investment B is more valuable than investment A and investment C is riskier than investment D
Investment B is more valuable than investment A and investment D is riskier than investment C
Investment A is more valuable than investment B and investment C is riskier than investment D
Investment A is more valuable than investment B and investment D is riskier than investment C
The Detroit facility is the most valuable of the 3 facilities
The Memphis facility is the most valuable of the 3 facilities
None of the other assertions is true
The Columbus facility is the most valuable of the 3 facilities
Two of the three facilities have equal value and those two facilities are more valuable than the third facility or all three facilities have the same value
Explanation / Answer
(1) All three facilities have equal sale cash flow of $ W. The value of each facility is given by the following relationship:
Value(facility) = W / (1+R)^(t) where R is the cost of capital and t is the time of sale for each facility. As is observable a low value of t and R would lead to a higher facility value.
The Memphis facility has the lowest cost of capital of P as Q>P. Further, Columbus facility and Memphis facility are both sold after Z years, thereby implying t = Z years. However, as R = Q for Columbus is greater than R =P for Memphis, the latter has the higher value of the two. The Detroit facility will have a lower value than the Memphis facility because its cost of capital Q and time T are both greater than the corresponding values for Memphis. Hence, the Memphis facility has the highest value.
Moreover, the statements 1 and 4 are both false as statement 2 is true. Additionally, none of the three facilities has equal value as they have different (t,R) combination. Hence, statement 5 is false.
Hence, statement 3 is also true. Therefore, statement 2 and 3 are the only true statements.
NOTE: Please raise separate queries for solutions to the remaining unrelated questions.
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