1. HW 5. Diversification and Investment Analysis Due Tuesday, October 31, 2023 Consider a farmer choosing...

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1. HW 5. Diversification and Investment Analysis Due Tuesday, October 31, 2023 Consider a farmer choosing enterprises to invest in as part of the operation's portfolio. The three enterprises are apples with expected returns of 10% (standard deviation of 4%), grapes with expected returns of 12% (standard deviation of 8%), and cherries with expected returns of 8% (standard deviation of 2%). If the farm invests in a portfolio that is one-third of each of the enterprises and the returns are not correlated, what is the expected return, standard deviation of returns and resulting coefficient of variation for the portfolio? 2. Consider a $260,000 investment that has the following income and expenses: Cash Year Revenues 2 6 8 Cash Expense 65000 28000 70000 30800 75000 33880 80000 37268 85000 40995 90000 45094 95000 49604 90000 54564 Net Cash Revenues A. What is the payback period for this investment? B. What is simple rate of return for this investment? 37000 39200 41120 42732 44005 44906 45396 45436 C. What is NPV if discount rate is calculated using WACC where equity costs 6%, debt 6.75%, in 25% tax bracket, financed by 10% equity and remainder by debt? Assume no tax implications and salvage value is $60,000. 3. Assume you have only $20,000 to investment and must choose between the two investments below. Analyze each investment using payback period and net present value methods assuming an 8 percent cost of capital (discount rate). Clearly label the results for each and indicate which investment would be preferred using that method. Also, what is the internal rate of return for each investment. Initial cost Net cash revenues Year 1 Year 2 Year 3 Year 4 Year 5 Terminal salvage value Time i) 4. Suppose you had a choice between the following mutually exclusive investment alternatives Initial cost (time 0) 12345 Investment A ($) 20,000 == Investment A -20,000 6,000 6,000 6,000 6,000 6,000 0 5,000 6,000 7,000 8,000 10,000 Investment B ($) 20,000 Cash flows Investment B -30,000 Which investment would you choose under each of the following rules? Simple Rate of Return Payback Period Net Present Value at 10% 10,000 5,000 15,000 10,000 10,000 5,000 5,000 5,000 5,000 5,000 6,000 1. HW 5. Diversification and Investment Analysis Due Tuesday, October 31, 2023 Consider a farmer choosing enterprises to invest in as part of the operation's portfolio. The three enterprises are apples with expected returns of 10% (standard deviation of 4%), grapes with expected returns of 12% (standard deviation of 8%), and cherries with expected returns of 8% (standard deviation of 2%). If the farm invests in a portfolio that is one-third of each of the enterprises and the returns are not correlated, what is the expected return, standard deviation of returns and resulting coefficient of variation for the portfolio? 2. Consider a $260,000 investment that has the following income and expenses: Cash Year Revenues 2 6 8 Cash Expense 65000 28000 70000 30800 75000 33880 80000 37268 85000 40995 90000 45094 95000 49604 90000 54564 Net Cash Revenues A. What is the payback period for this investment? B. What is simple rate of return for this investment? 37000 39200 41120 42732 44005 44906 45396 45436 C. What is NPV if discount rate is calculated using WACC where equity costs 6%, debt 6.75%, in 25% tax bracket, financed by 10% equity and remainder by debt? Assume no tax implications and salvage value is $60,000. 3. Assume you have only $20,000 to investment and must choose between the two investments below. Analyze each investment using payback period and net present value methods assuming an 8 percent cost of capital (discount rate). Clearly label the results for each and indicate which investment would be preferred using that method. Also, what is the internal rate of return for each investment. Initial cost Net cash revenues Year 1 Year 2 Year 3 Year 4 Year 5 Terminal salvage value Time i) 4. Suppose you had a choice between the following mutually exclusive investment alternatives Initial cost (time 0) 12345 Investment A ($) 20,000 == Investment A -20,000 6,000 6,000 6,000 6,000 6,000 0 5,000 6,000 7,000 8,000 10,000 Investment B ($) 20,000 Cash flows Investment B -30,000 Which investment would you choose under each of the following rules? Simple Rate of Return Payback Period Net Present Value at 10% 10,000 5,000 15,000 10,000 10,000 5,000 5,000 5,000 5,000 5,000 6,000

Answer rating: 100% (QA)

Solution 1 Portfolio expected return 01 13 012 13 008 13 01 Standard deviation 0042 13 0082 13 0022 ... View the full answer