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Chapter 4: Q 12BP (page 282)
You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
The investor will have $86,166.31 after 17 years.
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Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?
How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods? (LO12-4)
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows:
Project E (\(20,000 Investment) | |
Year | Cash flows |
1 | \)5,000 |
2 | 6,000 |
3 | 7,000 |
4 | 10,000 |
Project H (\(20,000 Investment) | |
Year | Cash flows |
1 | \)16,000 |
2 | 5,000 |
3 | 4,000 |
Determine the net present value of the projects based on a zero percent discount rate.
Determine the net present value of the projects based on a 9 percent discount rate.
The internal rate of return on Project E is 13.25 percent, and the internal rate of return on Project H is 16.30 percent. Graph a net present value profile for the two investments similar to Figure12-3. (Use a scale up to \(8,000 on the vertical axis, with \)2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)
If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.)
If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 6 percent, (2) 13 percent, (3) 18 percent? Once again, use the net present value profile for your answer.
What approaches can be taken in valuing a firm鈥檚 stock when there is no cash dividend payment?
Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the bonds for these maturity dates:
a. 30 years.
b. 15 years.
c. 1 year.
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