Question

Table: Rounded Depreciation Percentage by Recovery Year Using MACRS for First Four Property Classes

Percentage by recovery year

Recovery year 3 years 5 years 7 years 10 years

1 33% 20% 14% 10%

2 45 32 25 18

3 15 19 18 14

4 7 12 12 12

5 12 9 9

6 5 9 8

7 9 7

8 4 6

9 6

10 6

11 4

Total 100% 100% 100% 100%

a. Determine the after-tax cash outflows of Northwest Lumber under each alternative.

b. Find the present value of each after tax cash outflow stream, using the after-tax cost of debt.

c. Which alternative – lease or purchase – would you recommend? Why?

16-20 Options profit and losses

For each of the 100 share options shown in the following table, use the underlying stock price at expiration and other information to determine the amount of profit or loss an investor would have had, ignoring brokerage fees.

Option Types of options Cost of options Striking price per share Underlying stock price per share at expiration

A Call $200 $50 $55

B Call 350 42 45

C Put 500 60 50

D Put 300 35 40

E Call 450 28 26

Answer 1

I have answered question 16-20 as the details of the first question have not been provided.

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16-20

The amount of profit or loss that would have been made by an investor is calculated as below:

A

As it is a case of Call Option, the option will be exercised by the investor as the strike price is less than the underlying stock price at expiration. Therefore, the investor will earn a profit of $5 (55 - 50) per share. The total amount of profit/loss after adjusting for costs is derived as below:

Profit Made by Investor = Number of Shares*Profit Per Share - Cost of Options = 5*100 - 200 = $300

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B

As it is a case of Call Option, the option will be exercised by the investor as the strike price is less than the underlying stock price at expiration. Therefore, the investor will earn a profit of $3 (45 - 42) per share. The total amount of profit/loss after adjusting for costs is derived as below:

Loss To Investor = Number of Shares*Profit Per Share - Cost of Options = 100*3 - 350 = -$50

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C

As it is a case of Put Option, the option will be exercised by the investor as the strike price is higher than underlying stock price, providing a profit of $10 (60 - 50) per share to the investor. The value of total profit/loss earned by the investor is calculated as follow:

Profit Made by Investor = Number of Shares*Profit Per Share - Cost of Options = 100*10 - 500 = $500

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D

As it is a case of Put Option, the option will not be exercised by the investor, as he/she will be able to sell the shares at a higher price ($40) in the market. Therefore, the investor will let the option expire. The total amount of loss in this case would be equal to the cost of the options.

Loss To Investor = -$300 (equal to the cost of options)

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E

As it is a case of Call Option, the option will not be exercised by the investor, as he/she will be able to purchase the shares at a lower price ($26) in the market. Therefore, the investor will let the option expire. The total amount of loss in this case would be equal to the cost of the options.

Loss To Investor = -$450 (equal to cost of Options)

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Tabular Representation:

Option	Profit/Loss
A	$300
B	-$50
C	$500
D	-$300
E	-$450