Use the asset market approach to analyse the recent appreciation of the US Dollar. What is your forecast of the future value of the USDollar?

It might be surprising to find out that the market for fixed income securities is significantly larger than the more well-known market for equity securities. What types of investors are usually more interested in fixed income types of investments and why? It has often been suggested by so-called experts that individual fixed income investors should invest through bond mutual funds. Can you think of reasons why this suggestion makes sense or doesn't make sense?

Take a look at this financial plan for an EcoFriendly cleaning product. Do these financial assumptions make sense? If not, what financial assumptions would you make?

Financial Plan. According to Gallup News website 39% of people are buying green products in east coast of America. We are assuming that 39% in Boston are interested buying green products. The total population in Boston is 673,184, which means that 262,541 are buying green products. We want to reach 1% of the customers within 6 months. We are assuming that we can sell 1000 units in the first month and we will sell 15,249 units by year one as a short term objective. The total start cost is $56,500 and the total funds are $81,000 ending with $24,500 cash. We get $60,000 loan from one member's father and we contribute $7,000 each. Total fixed cost in the first year is $9,550 each month, and $17,470 each month in the second year. We are assuming that we will sell 1000 units in the first month because there are some cleaning companies in Boston that use green products only, and they will try our products. The total revenue in the first month is $4255 with $1000 product cost. By the end of the first month we end up with a negative net income of ($-6,759). We start making profit when the sales unit increases in month six. By the end of the year we are assuming that we will sell 15,249 units with $171,963 revenue, and total cost of good sold of $40,199. Our net income will be $11,596 in first year. Second year, we increase marketing budget and hire more employees to reach $331,614 total revenue. By the end of year 2 our net income will be $39,063 and $72,322 on year 3. We maintain a positive cash flow to service during the first six months where our net income is negative. After six month our cash flow increases because we assuming that we will have a positive net income by six month. There are money companies in the market selling the same products we have and that means that the demand for green products is increasing. Our business makes sense because there are customers buying cleaning products and we are adding the value to customers by providing green cleaning products at a competitive price.

Consider a $329,000; 4.2%; 30 year mortgage. (monthly payment and monthly compounding).

a. If a borrower submits an extra $10,000 towards principal along with the 36th payment, and if all other payments are made according to schedule, what's the projected balance at the end of the 5th year?

b. (Ignoring 5a) If you just turned 23 years old on the day this 30-year mortgage was originated, but would like to have the entire mortgage paid off by the time you are 50, what payment should you make each month?

**please include solutions

2. Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $815,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? Round to two decimal places.

3.

An investment of $83 generates after-tax cash flows of $38.00 in Year 1, $66.00 in Year 2, and $127.00 in Year 3. The required rate of return is 20 percent. The net present value is

Round to two decimal places.

4. McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $817,500, and $1,245,000 over the next three years. What is the payback period for this project? Round to four decimal places.

5.

Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project?

Year Project

0 ($11,368,000)

1 $ 2,157,589

2 $ 3,787,552

3 $  3,200,650

4 $ 4,115,899

5 $ 4,556,424

Round to two decimal places.

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $330,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,700,000. The cost of the machine will decline by $102,000 per year until it reaches $1,190,000, where it will remain.

a. If your required return is 14 percent, calculate the NPV if you purchase the machine today.

b. If your required return is 14 percent, calculate the NPV if you wait to purchase the machine until the indicated year.
  

a. You have an unpaid credit card debt of $2756. Your interest rate is 20.44%. Use Excel to determine how much you would have to pay each month in order to pay the debt back in 2 years. You will need to program a version of the present value of annuity formula, solving for PMT.

b. Using the information above show the paying down of the account until there is a zero balance. in other words make a table showing payment number, monthly payment, balance less payment, plus interest, and remaining balance. Assume no new charges have been made to the credit card.

c. Now assume you are starting as you were in part b. You make 6 of the same monthly payments and then decide to transfer the balance to another card. There is a one time transfer fee of 3% of the transferred balance. You resume the same monthly payments for 6 months, during which time you enjoy a 2.35% teaser rate. After these 6 months you continue making the same monthly payments at a 26.4% interest rate until the balance is paid off.

d. Use excel to determine the total interest paid back in both situations (part b & c). Was it worth it to transfer the balance to the other card? Why or why not?

In our discussion of efficient portfolios, we saw the we can directly find the optimal portfolio of risky assets (at least for an investor whose entire preference is defined by mean and variance) by maximizing the so-called Sharpe ratio. Explain why this optimization procedure works – that is, why is a maximum Sharpe ratio considered optimal. (Hints: Think about what a combination of the risk-free asset and any risky portfolio selected from the efficient frontier would look like. In other words, how would the set of combinations of the risky and the risk-free plot visually in our risk-return space? Consider the fact that a risk-free asset, of course, has zero variance and, thus, has zero-covariance with any other asset or portfolio.)

Discuss about that with approximately 400 words.

We are evaluating a project that costs $756,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 67,000 units per year. Price per unit is $60, variable cost per unit is $25, and fixed costs are $693,000 per year. The tax rate is 35 percent, and we require a return of 20 percent on this project.

a. Calculate the accounting break-even point.

b-1 Calculate the base-case cash flow and NPV.

b-2 What is the sensitivity of NPV to changes in the sales figure? ΔNPV/ΔQ

b-3 Calculate the change in NPV if sales were to drop by 500 units.

c. What is the sensitivity of OCF to changes in the variable cost figure? ΔOCF/ΔVC $

Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places.

$   million

What is the equivalent annual annuity for each plane? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answers to three decimal places.

Plane A: $   million

Plane B: $   million

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.

What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places.

years

What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.

years

What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places.

years

What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.

years

NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year, and those for the gas-powered truck will be $4,750 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places.

Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $ 5,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ What are the two projects' net present values, assuming the cost of capital is 10%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ What are the two projects' net present values, assuming the cost of capital is 15%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ What are the two projects' IRRs at these same costs of capital? Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: %

You deposited $50,000 in your mutual fund account today. You make no more deposits into your account, but 12 years from today your mutual fund account balance is $200,000. What annually compounded rate of return have you earned on your mutual fund over this time period? Enter your answer rounded to two decimal places.

Of the following companies, which has virtually little or no overseas exposure?

                                    A.  Ford

                                    B.  Wal Mart

                                    C.  CVS

                                    D.  Delta Airlines

                                    E.   Walgreens