You can choose among three investment alternatives. You are facing a capital market interest rate of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You can choose among three investment alternatives. You are facing a capital market interest rate of 4% p.a.: 1₁ k Is -850 -850 -850 340 68 t₂ 680 68 t 68 t 68 t 918 1200 a) First, define the NPV term, state the NPV formula, and explain what it is economically, when an investment of 850 has an NPV of, e.g., 42 while the capital market interest rate accounts for 4% p.a. (6 points) b) Then, calculate the NPVs of the three investments 1₁, 12, 13 and evaluate their acceptability and profitability. (9 points) c) Alternatively, to the NPV, investments can be compared by their simple internal rate of return. For starters, please write down the respective formula. How does this method distinguish acceptable from not-acceptable investments? Finally, please calculate the simple internal rates of return for the investments 1₁, 12, 13 and explain which investment now seems preferable. (12 points) d) Another approach to compare investments would be the dynamic repayment period. Please explain briefly - you can do so verbally, a calculation is not necessary - after how many years the investments 1₁, 12, 13 are repaid. Which investment should be preferred based hereupon? (5 Points) e) Assume that an investor has chosen 1₁. Now the investor learns that taxation must be included into the approach. The tax rate is 30%, which applies to I, as well as to capital market investments, which still yield 4% p.a. (pre-tax). Furthermore, the investment can be depreciated in a linear manner and the annual depreciation volumes d. are deductible. Please calculate the after-tax-NPV and evaluate your result. (8 points) You can choose among three investment alternatives. You are facing a capital market interest rate of 4% p.a.: 1₁ k Is -850 -850 -850 340 68 t₂ 680 68 t 68 t 68 t 918 1200 a) First, define the NPV term, state the NPV formula, and explain what it is economically, when an investment of 850 has an NPV of, e.g., 42 while the capital market interest rate accounts for 4% p.a. (6 points) b) Then, calculate the NPVs of the three investments 1₁, 12, 13 and evaluate their acceptability and profitability. (9 points) c) Alternatively, to the NPV, investments can be compared by their simple internal rate of return. For starters, please write down the respective formula. How does this method distinguish acceptable from not-acceptable investments? Finally, please calculate the simple internal rates of return for the investments 1₁, 12, 13 and explain which investment now seems preferable. (12 points) d) Another approach to compare investments would be the dynamic repayment period. Please explain briefly - you can do so verbally, a calculation is not necessary - after how many years the investments 1₁, 12, 13 are repaid. Which investment should be preferred based hereupon? (5 Points) e) Assume that an investor has chosen 1₁. Now the investor learns that taxation must be included into the approach. The tax rate is 30%, which applies to I, as well as to capital market investments, which still yield 4% p.a. (pre-tax). Furthermore, the investment can be depreciated in a linear manner and the annual depreciation volumes d. are deductible. Please calculate the after-tax-NPV and evaluate your result. (8 points)
Expert Answer:
Answer rating: 100% (QA)
a The Net Present Value NPV is the present value of the expected future cash flows from an investment minus the initial investment cost The formula fo... View the full answer
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Posted Date:
Students also viewed these corporate finance questions
-
Define the cash-flow statement and explain what it does.
-
Define beta and explain what it means.
-
Provide a program where you can choose among a set of functions (e.g., sin() and log()), provide parameters for those functions, and then graph them.
-
Consider the case of J polluters and with abatement cost functions C j (e j ) and one pollution victim. Abatement costs are ordered from highest to lowest such that C 1 (e 1 )>C 2 (e 2 )>>C J (e J )....
-
XM, Ltd., was a small engineering firm that built hi-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2014. Barb McLauren, head...
-
The line y = ax + b s called an oblique asymptote to the graph of y = f(x) if either or Find the oblique asymptote for F(x) = 2x4 + 3x3 - 2x - 4 / x3 - 1 lim LCr) (ax+ b)l o limo [f(x)-(ax + b)] = 0.
-
\((4 \times 3)^{4}\) Simplify the expression.
-
The following information was taken from the records of Clarkson Motorsports, Inc., at November 30, 2012: Requirement 1. Prepare a multi-step income statement for Clarkson Motorsports for the fiscal...
-
(b) A company is investigating the possibility of producing and marketing backyard storage sheds. Undertaking this project would require the construction of either a large or a small manufacturing...
-
Find a parabola y = ax2 + bx + c that passes through the point (1, 4) and whose tangent lines at x = -1 and x = 5 have slopes 6 and - 2, respectively.
-
Marci (class of '59) and Mark Matthews would like to make a significant gift to Barnard College and give their children some of their wealth while they are living. After exploring their options, they...
-
What are the two tests for determining whether a party may be joined in a lawsuit?
-
Rule 4 (e) of the Federal Rules of Civil Procedure permits service by any method allowed by the state law in which the district court is sitting. Do a search to determine the service of process rules...
-
Write a plan to build relationships with the sources of equity financing for a new business venture you are developing.
-
What are the roles of bankers and the government in the SBA lending process?
-
What are the different ways in which a defendant may be served with process?
-
Summary on BlueYonder software company and it's features of 1.Supply Chain Planning 2.Warehouse Management System 3.Transportation Management System
-
Does log 81 (2401) = log 3 (7)? Verify the claim algebraically.
-
June Klein, CFA, manages a $100 million (market value) U.S. government bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the...
-
Give an example of a cyclical stock, and discuss why you have designated it as such. Is it issued by a cyclical company?
-
Define a primary and secondary market for securities and discuss how they differ. Discuss how the primary market is dependent on the secondary market.
-
6. CPA QUESTION In order to negotiate bearer paper, one must: a. Indorse the paper b. Indorse and deliver the paper with consideration c. Deliver the paper d. Deliver and indorse the paper
-
7. On June 30, John N. Willis signed a demand promissory note for $1,620 to the Camelot Country Club in Carrollton, Texas. The note stated that it was being given in payment for a membership in the...
-
9. Barry Minkow founded ZZZZ Best, a publicly traded carpet cleaning company. The company had a $5 million line of credit from Prudential Bache. Sheri Elowsky
Study smarter with the SolutionInn App