Question

2. A. Explain in detail how the following can affect replacement decisions: i) taxes; ii) existing asset value; iii) economic life of the challenger and the defender; iv) technology

       B. You have $ 5 million dollars to invest in stocks. You have decided to do so in three

        firms. Following the example in class and in tabular form, divide the $ 5 million dollars

        among the three firms and calculate your expected return on your portfolio.

Answer 1

Answer:-

A)

Replacement Decisions:

The defender is current quality and also the contender is that the best offered replacement mortal. this price|market price|value} is that the value to use in getting ready a defender’s money analysis. undone prices—past costs that can't be modified by any future investment decision— mustn't be thought of in money analysis.

(i).

Have an effect on on taxes:

Replacement choices have an effect on on taxes whereas shrewd world wide web profits from sale of the previous quality, any gains or losses should be known to see the proper quantity of the chance price. If doable, replacement choices should be supported the money flows once taxes.

Every basic replacement call rules together with the method of shrewd money service life stay unchanged.

(ii).

Have an effect on on existing quality value:

The components replacement call ought to be supported facts and figures. The judgment relies on the prices of keeping the previous instrumentation against the price of its replacement. It includes the weather concerned in creating price comparison.

Gradually, equipments deteriorate and become obsolete. Frequent breakdowns occur, defective output will increase, unit labor prices rise, and production schedules can't be met. At now, one ought to decide whether or not or to not replace the instrumentation.

To recognize the higher different, understand the overall price of every different - keeping the previous instrumentation or shopping for a replacement. Once these prices area unit determined, compare them and determine the a lot of economical instrumentation.

(iii).

Economic lifetime of the contender and also the defender

The existing quality that's presently in commission and which is able to get replaced in future with a replacement quality is that the contender quality.

Analysis of the defender quality includes a benchmark comparison with one or a lot of of the money metrics related to the defender quality.

B)

Expected Return on portfolio is the weighted average return of all the stocks / securities in the portfolio.

Let the $ 5 Million be invested in the stocks of three firms A, B and C generating the return of 5 % , 8 % and 12 % respectively. The amount be invested in stock of firm A , firm B and firm C are $ 2.5 Million, $ 2 Million and $ 0.50 Million respectively.

Weight of investment in stock in A firm = 2.5 / (2.5 + 2 + 0.5) = 2.5 / 5 = 0.50

Weight of investment in stock in B firm = 2 / (2.5 + 2 + 0.5) = 2 / 5 = 0.40

Weight of investment in stock in C firm = 0.5 / (2.5 + 2 + 0.5) = 0.5 / 5 = 0.10

Expected Return on portfolio = Weight of investment in stock in A firm * Return on investment in stock in A firm + Weight of investment in stock in B firm * Return on investment in stock in B firm + Weight of investment in stock in C firm * Return on investment in stock in C firm.

= 0.50 * 5 + 0.40 * 8 + 0.10 * 12

= 6.90 %.

Conclusion:- Expected Return on portfolio = Weighted average return of all stocks / securities in portfolio.