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Chapter 4: Q6DQ. (page 279)
If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?
An investor with a choice of daily, monthly or quarterly compounding would choose daily compounding because this will result in the maximum returns for the investor.
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Question: Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?
Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given next:
Possible Market Reaction Sales in Units Probabilities
Low response ....................................... 20 0.10
Moderate response .............................. 40 0.30
High response ...................................... 55 0.40
Very high response ............................... 70 0.20
a. What is the expected value of unit sales for the new product?
b. What is the standard deviation of unit sales?
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.
Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 15 percent annual interest. The current yield to maturity on such bonds in the market is 17 percent. Compute the price of the bonds for these maturity dates:
a. 30 years.
b. 20 years.
c. 4 years.
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is \(60,000. The annual cash flows have the following projections:
Year | Cashflow |
1 | \)23,000 |
2 | 26,000 |
3 | 29,000 |
4 | 15,000 |
5 | 8,000 |
a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return?
c. Should the project be accepted? Why?
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