发布时间 : 星期日 文章Finc201_Spring10_Quiz1 Quiz 1_Solutions更新完毕开始阅读
2A. You can either lease a car or purchase it on a 3-year loan. The car you wish to buy costs $35,000. The dealer has a special leasing arrangement where you pay $1 today and $450 per month for the next 3 years. If you purchase the car, you will pay it off in monthly payments over the next 3 years at an 8% APR. You believe that you will be able to sell the car for $23,000 in three years. Should you buy or lease the car? (5 points)
2B. You are considering investing in 2 different investments. Both the investments have up- front costs of $50,000. Investment A returns $85,000 in 5 years. Investment B returns $175,000 in 11 years. Which of these two investments would you choose? (5 points)
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3. An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%.
A. Without issuing the new security, the NPV for this project is closest to what amount? Should the film maker make the investment? (5 points) $2.7 million; Yes
NPV = -20 + 25 / 1.10 = $2.7 million, since NPV > 0 take the investment
B. Assuming that the film maker issues the new security, the NPV for this project is closest to what amount? Should the film maker make the investment? (5 points)
$2.7 million; Yes
NPV = -10 + (25 - 11) / 1.10 = 2.7 million, since NPV > 0 then invest
4. Assume that you are 30 years old today, and that you are planning on retiring at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual
contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. At retirement (age 65) you will begin
withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday). If you expect to die one day before your 101st birthday (Your last withdraw will be on your 100th birthday) and if the annual rate of return is 7%, then how much money will you have to spend in each of your golden years of retirement? (10 points)
$71,260
First deposit = .08 × $45,000 = $3,600
??1?.05?35?1?1??? (1.07)35= $928,895 $3,600 × ?.07?.05??1?.07????
so,
N = 36 I = 7
PV = 928,895 FV = 0
Compute PMT = 71260
5. Consider two mutually exclusive projects with the following cash flows: (15 points)
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C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 Project A $(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A B $(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
A. You are considering using the incremental IRR approach to decide between the two
mutually exclusive projects A & B. How many potential incremental IRRs could there be?
Project A B B - A C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 ($41,215) $12,500 $14,000 $16,500 $18,000 20,000 0 ($46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 ($5,560) $2,500 $1,000 ($1,500) ($3,000) ($5,000) $15,000
B. If the discount rate for project A is 16%, then what is the NPV for project A?
NPV A
CF0 = -41,215 CF1 = 12,500 CF2 = 14,000 CF3 = 16,500 CF4 = 18,000 CF5 = 20,000 I = 16
Compute NPV = $9,999.50
C. If the discount rate for project B is 15%, then what is the NPV for project B?
NPV B
CF0 = -46,775 CF1 = 15,000 CF2 = 15,000 CF3 = 15,000 CF4 = 15,000 CF5 = 15,000 CF6 = 15,000
Compute NPV = $9,9992.24
D. What is the incremental IRR for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?
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Project A B B - A C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6 ($41,215) $12,500 $14,000 $16,500 $18,000 20,000 0 ($46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 ($5,560) $2,500 $1,000 ($1,500) ($3,000) ($5,000) $15,000
E. Assuming that the discount rate for project A is 16% and the discount rate for B is 15%,
then given that these are mutually exclusive projects, which project would you take and why?
NPV A
CF0 = -41,215 CF1 = 12,500 CF2 = 14,000 CF3 = 16,500 CF4 = 18,000
CF5 = 20,000 I = 16
Compute NPV = $9,999.50
NPV B
CF0 = -46,775 CF1 = 15,000 CF2 = 15,000 CF3 = 15,000 CF4 = 15,000 CF5 = 15,000 CF6 = 15,000
Compute NPV = $9,9992.24
Take A, since NPV of A > NPV of B and both are positive
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