An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $240.41 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84.88 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 16%.

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   NPV $   million
   IRR  %

   Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $   million
   IRR  %

2. How should the environmental effects be dealt with when evaluating this project?
   1. The environmental effects should be ignored since the plant is legal without mitigation.
   2. The environmental effects should be treated as a sunk cost and therefore ignored.
   3. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.
   4. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.
   5. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
3. Should this project be undertaken?
   1. The project should be undertaken only under the "mitigation" assumption.
   2. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.
   3. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.
   4. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.
   5. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $270.22 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $93.42 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 16%.

1. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
   NPV: $   million
   IRR:   %

   Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
   NPV: $   million
   IRR:   %

2. How should the environmental effects be dealt with when evaluating this project?
   1. The environmental effects should be treated as a sunk cost and therefore ignored.
   2. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.
   3. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.
   4. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
   5. The environmental effects should be ignored since the plant is legal without mitigation.
3. Should this project be undertaken?
   1. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.
   2. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.
   3. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.
   4. The project should be undertaken only under the "mitigation" assumption.
   5. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.

You and your team are financial consultants who have been hired by a large, publicly-traded electronics firm, Brilliant Electronics (BI), a leader in its industry. The company is looking into manufacturing its new product, a machine using sophisticated state of the art technology developed by BI’s R&D team, overseas. This overseas project will last for five years. They’ve asked you to evaluate this project and to make a recommendation about whether or not the company should pursue it. BI’s management team needs your recommendation and the analysis used to arrive at it by no later than December 3, 2019.

The following market data on BI’s securities are current:

Debt: 210,000 6.4 percent coupon bonds outstanding, 25 years to maturity, selling or 108 percent of par; the bonds have $1000 par value each and make semi-annual payments

Common Stock: 8,300,000 shares outstanding, selling for $68 per share; beta=1.1

Preferred Stock: 450,000 shares of 4.5% preferred stock outstanding, selling or $81 per share

Market: 7 percent expected market risk premium; 3.5 percent risk-free rate

The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.4 million on an after-tax basis.   In five years, the after-tax value of the land will be $4.8 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $37 million to build.

At the end of the project (the end of year 5), the plant can be scrapped for $5.1 million. The manufacturing plant will be depreciated using the straight-line method.

The company will incur $6,700,000 in annual fixed costs excluding depreciation. The plan is to manufacture 15,300 machines per year and sell them at $11,450 per machine; the variable production costs are $9,500 per machine. Selling price and costs are expected to remain unchanged over the life of the project.

BI uses PK Global (PKG) as its lead underwriter. PKG charges BI spreads of 8% on new common stock issues, 6% on new preferred stock issues, and 4% on new debt issues. PKG has included all direct and indirect issuance costs (along with its profit) in setting these spreads. BI’s tax rate is 35 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume BI raises all equity for new projects externally (that is, BI does not use retained earnings).

The weighted average flotation cost is the sum of the weight of each source of funds in the capital structure of the company times the flotation costs, so:

f_T = ($564.4/$827.65)(0.08) + ($36.45/$827.65)(0.06) + ($226.8/$827.65)(0.04) = 0.0682, or 6.82%

Thus the initial investment is increased by the amount of flotation costs:

                  (Amount raised)(1 – 0.0682) = $37,000,000   

                  Amount raised = $37,000,000/(1 – 0.0682) = $39,708,092

1. Calculate the firm’s current cost of capital using the information provided.

2. Calculate the project’s cost of capital (the appropriate discount rate to use to evaluate BI’s new project) assuming the capital structure will remain the same if the project is undertaken.

This project is somewhat riskier than a typical project for BI; therefore, management has asked you to use an adjustment factor of 12% to account for this increased riskiness (that is, to add 12% to the firm’s cost of capital) to estimate the project’s required rate of return.

(NOTE: Flotation costs do not have to be considered when calculating the required rate of return for each class of security – they are addressed in this problem by adjusting the cost of the initial investment to $39,708,092 from $37,000,000).

3. Calculate the project’s annual cash flows, taking into account all the relevant cash flows.

   1. Calculate the project’s initial Time 0 cash flow, taking into account all relevant cash flows.

   2. Calculate the project’s annual operational cash flows (OCF) over the life of the project.

   3. Calculate the project’s terminal (last year of the project) cash flow. Include all relevant cash flows.

(Note: You can present the cash flows from Year 0 to Year 5 in a table format)

4. What is the NPV and IRR of the project?

This problem summarizes typical transactions engaged in by not-for-profit organizations. The American Association for Freedom, a political think tank, was recently established. During its first year of operations it engaged in the following transactions and was affected by the following events (in summary form):

1. It received a $10,000,000 endowment contribution, all in stocks and bonds.

2. It received $3,000,000 in additional contributions, all restricted for its educational programs and $2,300,000 in unrestricted contributions.
3. It acquired $800,000 in furniture, fixtures, and equipment, all of which have an expected useful life of 10 years.
4. It recognized depreciation on the furniture, fixtures, and equipment, purchased earlier in the year.

5. It spent $2,400,000 on educational programs.

6. It earned $300,000 in interest and dividends on its endowment investments.

7. By year-end the value of its investments had appreciated by $600,000.

8. It incurred $1,300,000 in administrative expenses.

9. Near year-end it received a pledge of $4,500,000, to be fulfilled in three annual installments of $1,500,000 beginning in one year. The Association determined that a discount rate of 6 percent was appropriate.

a. Prepare journal entries to record these events and transactions. Be sure to indicate the fund-type in which the entry would be made.
b. Prepare a year-end statement of financial position and statement of activities.

Environmental fate of medications Medications can enter wastewater management systems either through human excretions or through improper disposal. Many medications are not effectively treated by current wastewater management processes and therefore are discharged by wastewater treatment plants. Antidepressants are some of the most commonly prescribed medications in the United States, and many antidepressants are not effectively managed by wastewater treatment plants. a. A wastewater treatment plant discharges to Boulder Creek in Colorado at a rate of 64 million L/day, and the stream flow, upstream of the wastewater discharge point, is 1110 L/s. If the concentration of the antidepressant venlafaxine (Effexor) measured in the creek water is 10 ng/L, what is the mass discharged per day from the wastewater treatment plant, assuming that there are no sources other than the wastewater treatment plant, and assuming that the drug rapidly equilibrates among sediment, fish, and water? What is the concentration of the medication in the wastewater treatment plant effluent? BCF = 40.27 KOC = 3.162 Organic sediment = 15 ppm Biota concentration = 5 g/100 m3 b. A man fishing near the outflow point of Boulder Creek eats 0.2 kg of fish from the creek. How much venlafaxine will he ingest? One dose of Effexor contains 75 mg of venlafaxine. What percentage of a dose will the fisherman ingest?

Waterways mass-produces a special connector unit that it normally sells for $3.90. It sells approximately 37,500 of these units each year. The variable costs for each unit are $2.20. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 15,300 of these units at $2.50 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.

An irrigation company has asked for a special order of 1,900 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.00 per unit.

(a)

What are the consequences of Waterways agreeing to provide the 15,300 units to the Canadian company? Would this be a wise “special order” to accept?

1. Donald Trump promised a more aggressive fiscal policy with a large increase in spending and significant tax cuts leading to a much larger government (budget) deficit. The US economy was at near the full employment (the unemployment rate in the US was low below 5%), what do you expect will be the response of the US Central Bank in terms of changes to the cash rate? Explain.

2. The Central Bank of New Zealand has a higher inflation target than the Reserve Bank of Australia. Does this tend to depreciate or appreciate the New Zealand dollar against the Australian dollar? Explain

3. What are the reasons for increasing convergence between emerging economies (defined as countries with lower GDP per capita but growing rapidly) and advanced economies (countries with high GDP per capita but lower growth)? Explain.

4. You have successfully secured the mortgage of worth in $1,000,000 from the Bank to purchase a house. After the contract has been written, inflation in the economy turned out to lower than what was expected. Who gained and lost from this development? Explain.

Answer

5. The government (and the central bank) has an easier job of dealing with the macroeconomic impacts of consumers and investors being pessimistic about the future of the economy than the period of stagflation. Do you agree? Explain

Answer

Write a R code

HW09  The National Institute of Diabetes and Digestive and Kidney Diseases

conducted a study on 768 adult female Pima Indians living near Phoenix.

The pima dataset resulting from the study is available in R and contains the following variables:

test - results of a test to determine if the female patient shows signs of diabetes

         (coded 0 if negative, 1 if positive)

age - Age (years)

bmi - Body mass index (weight in kg/(height in metres squared))

diastolic - Diastolic blood pressure (mm Hg)

diabetes - Diabetes pedigree function

glucose - Plasma glucose concentration at 2 hours in an oral glucose tolerance test

insulin - 2-Hour serum insulin (mu U/ml)

pregnant - Number of times pregnant

triceps - Triceps skin fold thickness (mm)

The following logistic model with test as the response was fit with the following table results:

logistic <- glm(test ~ age + bmi + diastolic + diabetes + glucose + insulin + pregnant +

triceps,family=binomial(logit),data=pima)

A positive test result (test=1) was modeled as an event. Compute the following measures:

Accuracy

Sensitivity

Specificity

Positive Predictive Value

Negative Predictive Value