You can choose among three investment alternatives. You are facing a capital market interest rate of...
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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:
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