​Time: Investment​ A:

Investment​ B:

0

A: − $2 million

B: − $2 million

1

A: $600,000

B: $1,000,000

2

A: $800,000

B: $800,000

3

A: $1,000,000

B: $600,000

An investor is considering the two investments shown above. Her cost of capital is 7​%. Which of the following statements about these investments is​ true?

1. The investor should take investment A since it has a greater internal rate of return​ (IRR).

2. The investor should take investment B since it has a greater net present value​ (NPV).

3. The investor should take investment A since it has a greater net present value​ (NPV).

4. The investor should take investment B since it has a greater internal rate of return​ (IRR).

The correct answer is The investor should take investment B since it has a greater net present value​ (NPV). Please can you show step by step how to get this answer and not use excel thank you.

Johnny Wellington, an entrepreneur who wants to engage in a short term business project, comes to you for advice. As an expert in capital budgeting, Johnny wants you to study the feasibility of the project. In particular, he needs your help to forecast the upcoming cash flows the project is going to require and generate throughout its life. After a few meetings with Johnny and his business partners, you suggest that a pilot run be conducted.

Upon completion of the pilot run at the end of year 1, Johnny and his associates can choose either to continue with the project or terminate it. You forecast that this project will generate cash flows for 4 years after the pilot run if Johnny decides to further proceed.

The pilot run costs $1.0 million to start and if they decide to continue with the project after this pilot run, an additional investment cost amounting to USD1.6 million will be incurred at the end of year 1. The investment cost of USD1.6 million will be fully depreciated on a straight line basis over the life of the project with no scrap value at the end. If the outcome from the pilot run is positive, Johnny can launch the project in full scale at the end of year 1. Revenues, variable costs and fixed costs for years 2 through 5 are estimated to be as follows:

However, if the outcome from the pilot run is not encouraging and the team decides to launch the project in full scale, the following estimates are obtained:

You project that the pilot run has a 60% chance of being successful (i.e. outcome is positive).

To finance the pilot run and the full-scale project, Johnny and his associates decide to use 50% debt and 50% equity. An investor who is Johnny’s high school buddy, Barry Lawson, agrees toenter into a special arrangement in which 5-year promissory notes with a face value of USD1000 per note will be sold to Barry at a price of USD694.11 per note. These notes do not make intermediate interest payments. (Note: Consider annual compounding for the promissory notes.)

You gather some market data to work out the equity beta for the project and it is determined to

be 1.50. Further, the market return and T-bill rate are 11 % and 4%, respectively. Assume the

T-bill rate is an appropriate proxy for the risk-free rate of return. Profits and losses from the project will be taxed at a rate of 34%.

Assume the Capital Asset Pricing Model (CAPM) is valid.

Required

a) Determine the after-tax cost of debt. (1 mark)

b) Determine the cost of equity. (1 mark)

c) Calculate the weighted average cost of capital for the project.

d) What is the present value of the cash flows at year 1 if outcome from the pilot run is positive and the team decides to launch the project in full scale? Ignore your answer in part c) and use 10% as the appropriate discount rate. [Hint: Consider cash flows from year 1 onwards]

e) What is the present value of the cash flows at year 1 if outcome from the pilot run is negative and the team decides to launch the project in full scale? Ignore your answer in part c) and use 10% as the appropriate discount rate. [Hint: Consider cash flows from year 1 onwards]

f) Should the project be implemented today (i.e. year 0)? Provide relevant and supporting calculations. Again, ignore your answer in part c) and use 10% as the appropriate discount rate. Show all steps and give proper explanations.

Compute the monthly payments on a 3-year lease for a $26,775 car if the annual rate of depreciation is 12% and the lease's annual interest rate is 4.7%.

What is the “impossibility trinity” in foreign exchange markets?

Discuss with reference to the foreign exchange regime in Hong Kong.

What is the value today of a money machine that will pay $1,618.00 every six months for 17.00 years? Assume the first payment is made 4.00 years from today and the interest rate is 7.00%.

Answer format: Currency: Round to: 2 decimal places.

unsure if I'm doing the process right. thanks

Derek will deposit $2,687.00 per year into an account starting today and ending in year 18.00. The account that earns 11.00%. How much will be in the account 18.0 years from today?

Answer format: Currency: Round to: 2 decimal places.

unsure if I'm doing the process correctly. thanks

What is the value today of a money machine that will pay $2,848.00 every six months for 16.00 years? Assume the first payment is made 3.00 years from today and the interest rate is 14.00%.

Answer format: Currency: Round to: 2 decimal places.

Derek will deposit $865.00 per year into an account starting today and ending in year 6.00. The account that earns 9.00%. How much will be in the account 6.0 years from today?

Answer format: Currency: Round to: 2 decimal places

could really use the help. not sure if I'm doing the process right. thanks

You are managing a portfolio of $1.0 million. Your target duration is 21 years, and you can choose from two bonds: a zero-coupon bond with maturity five years, and a perpetuity, each currently yielding 2%.

a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. How will these fractions change next year if target duration is now twenty years?

a) What are the basic functions of a financial system?

Why is financial system important for improving economic welfare and promoting economic growth?

7. Systemic risk can be divided into cross sectional systemic and the time series dimension of risk.

Explain each of these, providing examples.

Question No : 31 I have a portfolio of two stocks. The weights are equal. The one volatility is 30% while the other is 40%. The minimum and maximum possible values of the volatility of my portfolio are:

A. 30% and 40% B. 5% and 35% C. 10% and 40% D. 10% and 70%

Suppose the risk-free rate is 3.61% and an analyst assumes a market risk premium of 7.61%. Firm A just paid a dividend of $1.41 per share. The analyst estimates the β of Firm A to be 1.49 and estimates the dividend growth rate to be 4.35% forever. Firm A has 250.00 million shares outstanding. Firm B just paid a dividend of $1.97 per share. The analyst estimates the β of Firm B to be 0.73 and believes that dividends will grow at 2.16% forever. Firm B has 186.00 million shares outstanding. What is the value of Firm A?

Answer format: Currency: Round to: 2 decimal places.

not sure if I'm doing the process right. thanks

A 2-step binomial tree is used to value an American put option with strike 104, given that the underlying price is currently 100. At each step the underlying price can move up by 20% or down by 20% and the risk-neutral probability of an up move is 0.55. There are no dividends paid on the underlying and the discretely compounded risk free interest rate over each time step is 2%. What is the value of the option in this model? A. 11.82 B. 12.33 C. 12.49 D. 12.78