As Sig Ment 1 Answer
4
3.15 a. This calls for the growing perpetuity formula with a negative growth rate (g = -0.04): b. The pipeline’s value at year 20 (i.e., at t = 20), assuming its cash flows last forever, is: With C 1 = $2 million, g = -0.04, and r = 0.10: Next, we convert this amount to PV today, and subtract it from the answer to Part (a): 3.27 a. Each installment is: $9,420,713/19 = $495,827 PV = $495,827 [Annuity Factor, 8%, t = 19] PV = $495,827 9.604 = $4,761,923 b. If ERC is willing to pay $4.2 million, then: $4,200,000 = $495,827 [Annuity Factor, x%, t = 19] This implies that the annuity factor is 8.471, so that, using the annuity table for 19 times periods, we find that the interest rate is about 10 percent. 3.29 First, with nominal cash flows: a. The nominal cash flows form a growing perpetuity at the rate of inflation, 4%. Thus, the cash flow in 1 year will be $416,000 and:
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Transcript of As Sig Ment 1 Answer
3.15 a.This calls for the growing perpetuity formula with a negative growth rate (g=-0.04):
b. The pipelines value at year 20 (i.e., at t = 20), assuming its cash flows last forever, is:
With C1 = $2 million, g = -0.04, and r = 0.10:
Next, we convert this amount to PV today, and subtract it from the answer to Part (a):
3.27a.Each installment is: $9,420,713/19 = $495,827
PV = $495,827 ( [Annuity Factor, 8%, t = 19]
PV = $495,827 ( 9.604 = $4,761,923
b.If ERC is willing to pay $4.2 million, then:
$4,200,000 = $495,827 ( [Annuity Factor, x%, t = 19]
This implies that the annuity factor is 8.471, so that, using the annuity table for 19 times periods, we find that the interest rate is about 10 percent.
3.29 First, with nominal cash flows:
a. The nominal cash flows form a growing perpetuity at the rate of inflation, 4%. Thus, the cash flow in 1 year will be $416,000 and:
PV = $416,000/(0.10 - 0.04) = $6,933,333
b. The nominal cash flows form a growing annuity for 20 years, with an additional payment of $5 million at year 20:
Second, with real cash flows:
a. Here, the real cash flows are $400,000 per year in perpetuity, and we can find the real rate (r) by solving the following equation:
(1 + 0.10) = (1 + r) ( (1.04) ( r = 0.0577 = 5.77%
PV = $400,000/(0.0577) = $6,932,409
b.Now, the real cash flows are $400,000 per year for 20 years and $5 million (nominal) in 20 years. In real terms, the $5 million dollar payment is:
$5,000,000/(1.04)20 = $2,281,935
Thus, the present value of the project is:
5.1 a.
b. PaybackA = 1 year
PaybackB = 2 years
PaybackC = 4 years
c. A and B.
7. 5.7 a.The figure on the next page was drawn from the following points:
Discount Rate
0%10%20%
NPVA+20.00+4.13-8.33
NPVB+40.00+5.18-18.98
b. From the graph, we can estimate the IRR of each project from the point where its line crosses the horizontal axis:
IRRA = 13.1% and IRRB = 11.9%
c. The company should accept Project A if its NPV is positive and higher than that of Project B; that is, the company should accept Project A if the discount rate is greater than 10.7 percent and less than 13.1 percent.
d. The cash flows for (B A) are:
Therefore:
Discount Rate
0%10%20%
NPVB-A+20.00+1.05-10.65
IRRB-A = 10.7%
The company should accept Project A if the discount rate is greater than 10.7% and less than 13.1%. As shown in the graph, for these discount rates, the IRR for the incremental investment is less than the opportunity of cost of capital.
EMBED Equation.3
EMBED Excel.Sheet.8
_1087056900.unknown
_1490792307.unknown
_1490792479.unknown
_1087057251.unknown
_1087057411.unknown
_1093777452.xlsChart2
204020
4.135.181.05
-8.33-18.98-10.65
Project A
Project B
Increment
Rate of Interest
NPV
Figure 5.6
Sheet1
0%20.0040.0020.00
10%4.135.181.05
20%-8.33-18.98-10.65
Sheet1
Project A
Project B
Increment
Rate of Interest
NPV
Figure 5.6
Sheet2
Sheet3
_1087057161.unknown
_1086615380.unknown
_1086615775.unknown
_1085999493.unknown
_1086000104.unknown
