What is profitability Index? Given the discount rates and the future cash flows of each project, which project should they accept using Profitability Index?

At the beginning of the year, you buy 800 shares in Muleshoe Mutual Fund, which currently has a NAV of $48.10. The fund has a front-end load of 1.8%. Over the year, the fund distributed capital gains of $1.75 per share and dividend distributions of $1.42. At the end of the year, the NAV was at $54.47 and the offer price was at $55.45.

A. If you sell after one year, what is your HPR?

B. Recalculate your HPR, assuming you bought 800 shares at the beginning of the year, reinvested all your distributions at an average price of $51, and sold your shares at the end of the year.

Solo Corp. is evaluating a project with the following cash flows:

Year 0 Cash Flow –$ 28,900

Year 1 Cash Flow $11,100

Year 2 Cash Flow $13,800

Year 3 Cash Flow $15,700

Year 4 Cash Flow $12,800

Year 5 Cash Flow $– 9,300

The company uses a discount rate of 13 percent and a reinvestment rate of 6 percent on all of its projects.

a.)Calculate the MIRR of the project using the discounting approach.

b.) Calculate the MIRR of the project using the reinvestment approach.

c.) Calculate the MIRR of the project using the combination approach.

6. Assume the annual interest rate on a $500,000 7-year balloon mortgage is 6 percent. Payments will be made monthly based on a 30-year amortization schedule.

f. What will be the remaining mortgage balance on the new 4.5 percent loan at the end of year 7 (four years after refinancing)?

g. What will be the difference in the remaining mortgage balances at the end of year 7 (four years after refinancing)?

h. At the end of year 3 (beginning of year 4), what will be the present value of the difference in monthly payments in years 4–7, discounting at an annual rate of 4.5 percent?

1. Prices of several bonds are given below:

   *Half

   Bond Principal($)	Time to maturity(years)	Annual coupon*($)	Bond price($)
   100	0.5	0	98.9
   100	1	0	97.5
   100	1.5	4	101.6
   100	2	4	101.9

   the stated coupon is assumed to be paid semiannually.
   (a) Use the bootstrap method to find the 0.5-year, 1-year, 1.5-year and 2-year zero rates per annum with continuous compounding.
   (b) What is the continuously compounded forward rate for the period between the 1-year point and the 2-year point?

The management of Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $8,000. The useful life of the equipment is 4 years. Management projected that annual cash inflow for four(4) years as follow: year-1 $1,000, year-2 $3000, year-3 $3500 and year-4 $4000. There’s maintenance cost for the equipment, and management should expense: $600 on year-2 and $800 on year-4. The management wants a 14% return on all investments. a. Compute net present value (NPV) of this investment. b. Should the equipment be purchased according to NPV analysis?

XYZ Company reports the following initial balance and subsequent purchase of inventory. Assume that 2,000 units were sold during the year. Compute the costs of goods sold and balance of inventory for the year on the year-end balance sheet under the weighted average inventory costing methods. Inventory balance at beginning of year 1,400 units @ $150 each 210,000 inventory purchased during the year 800 units @ $180 each 144,000 Cost of goods available for sale during the year 2,200 units 354,000

A. 321,818; 32,182

B. 318,000; 36,000

C. 324,000; 30,000

D. 300,000; 54,000

F Corporation purchased equipment for $450,000. Residual value at the end of the estimated 6 years or 150,000 hours service life is expected to be $60,000.

Using Straight-line depreciation, determine:

1. Book value at the end of year 3      $_____

Using  180% declining balance depreciation, determine:

2. Depreciation expense for year 2     $_____
3. Depreciation expense for year 3     $_____

Using Activity based depreciation, determine:

4. Depreciation expense for year 3    $____
5. Book value at the end of year 3      $____

ADM Co. is planning to purchase a new bottle-corking line for $200,000. The machine falls under the 3-year MACRS category. ADM’s CFO estimates that the company’s EBDT for the next four years will be as follows:

Year 1: $100,000

Year 2: $115,000

Year 3: $95,000

Year 4: $55,000

ADM’s cost of capital is 12% and the company is in the 25% tax bracket.

Hint: determine the annual depreciation, then calculate the cash flow for each year, then determine the PV of the cash flows.

1. What is the proposed investment project’s NPV
2. Should ADM invest in the bottle-corking line?

Answer:

(a) $

(b)

You are offered a one-year forward rate in two-years of 2.5% (i.e. you can enter into a contract today to lock in a 2.5% return on a one-year security purchased in two years). Based on the current yield curve, the implied forward rate on a one-year Treasury security purchased in two years should be 1.85%.

How can you profit from this opportunity? Be specific (i.e. at what rates will you borrow; in which security (ies) would you invest?