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Ia} Boxer Ltd manufactures plywood sheets used in the building industry. The selling price per sheet is 10.60 in the economy's good state and 130 in the bad state. The nsicneutl'al probability of each of these states is 0.5. Boxer can sell all the sheets that it produces. The sheets can be made trorn either two types oi wood, pine and hr. The cost per sheet using pine is 10.10 in the good state and 6.80 in the bad state. The cost per sheet using r is 9.10 in the good state and 8.50 in the bad state. Boxer is committed to producing one million sheets during the current year (year 1} using pine and is planning its production tor year 2. Assume a riskfree rate of zero. {i} if Boxer produces one million sheets using pine in year 2, what is the expected present value otthe year 2 net cash ow? What is its expected present value it Boxer uses r? {3 marks} Assume now that at the end of year 1, Boxer will know the economy's state in year 2. {ii} Assume that Boxer produces one million sheets in year 2 and can either continue using pine, or switch to using iir. What is the expected value oime option to switch? Explain. | {5 marks) {iii} Suppose that in year 2, Boxer can choose to increase its production to 1.5 million sheets, using either pine or r for the additional production. The cost of this expansion will be 600,000 regardless otwhich raw material is used. What is the expected value now of the option to expand using pine? What is the expected value now of the option to expand using r? {5 marks) {iv} Suppose that the oph'on to switch to production using r requires machinery to be modied now. What is the maximum amount Boxer should pay to modify the machinery? Explain. {4 marks]: bl Hawk plc has the following projects in which it can invest: Project Cash Present value NPV at outow at at t=0 of cash (=0, m t= rn inows m A T t] 19 9 B 13 38 25 C 3.8 "(.3 3.5 D 5.0 9.9 4.9 E 4.8 "(.1 2.3 Page 3 of a U L21 i007? Hawk has no other investment opportunities. Projects C and D are mutually exclusive. The capital investment budget at t=0 is limited to 25 million. Hawk pie is committed to maximising the wealth of its shareholders. How should Hawk utilise its capital investment budget it {E} all projects are divisible (can be scaled down )? {4 marks) {ii} all projects are intlhrisible'iI {4 marks} (Total = 25 marks) You are given the following data relating to an economy: Ca = 0.7Y I = $33m G =$12m X =f15m (i) Calculate the equilibrium level of national income. [1] (ii) If the national income were f250 million, calculate the unplanned change in stock levels. [1] (iii) Calculate the change in national income if planned investment rises from f33 million to f42 million. [1] [Total 3]