Ans 1- a PV (at 12%)Cash flowyear 0Rs -50,000.00year 1 8,928.57year 215,943.88year 3 21,353.41year 4 12,710.36year 5 2,837.13NPVRs 11,773.35

b.21.1% (or 21%, rounded off to nearest percent)

PV (at 21.1%)Cash flowyear 0Rs -50,000.00year 18,257.64year 213,637.72year 316,892.30year 4 9,299.37year 51,919.77NPVRs 6.80

c.Yes, this project should be accepted. The net present value is positive and, correspondingly, the internal rate of return is higher than the cost of capital.

Ans2- The results can be calculated in two ways:a. Calculate NPV of each years value:

Today 1 2 3 4 5 6 70.0 80.0 86.0 89.4 90.2 88.2 84.7

The NPV in year 5 is lower than in year 4. This indicates that the collection should be sold at the end of year 4.

b.Calculate the growth rate each year. The growth rate is actually the internal rate of return. When that becomes smaller than the cost of capital, the collection should be sold. 1 2 3 4 5 6 25.7% 18.2% 14.4% 10.9% 7.6% 5.6% IRR < k in year 5.

Ans3- Year 1Year 2Year 3Year 4Year 5RevenueRs 50,000Rs 80,000Rs 80,000Rs 80,000Rs 40,000- Cost & Exp25,00040,00040,00040,00020,000- Deprec.30,00030,00030,00030,00030,000Profit b.tRs -5,000Rs 10,000Rs 10,000Rs 10,000Rs -10,000Taxes+2,000-4,000-4,000-4,000+4,000Profit a.tRs -3,000Rs 6,000Rs 6,000Rs 6,000Rs -6,000+ Deprec.30,00030,00030,00030,00030,000Cash FlowRs 27,000Rs 36,000Rs 36,000Rs 36,000Rs 24,000PV (at 12%)24,10728,69925,62422,87913,618

Total present value of operating cash flows:Rs 114,927

Present value of salvage: Since book value is 0, a 40% tax must be paid on the Rs 10,000. The remaining Rs 6,000 must be discounted at 12% for 5 years (PV factor is .5674). Thus, present value is Rs 3,404.

Present value of returned working capital: Rs 15,000 x .5674 = Rs 8,511.

Summary:Original investmentRs -150,000PV of operating cash flows114,927PV of salvage 3,404Additional working capital-15,000Return of working capital 8,511Net present value Rs -38,158Since the net present value is negative, the purchase is not indicated.

ANS 4- Market value weights:

Bonds (20,000 x Rs 980)Rs 19,600,000 28%Common stock (1,000,000 x Rs 50) 50,000,000 72TotalRs 69,600,000100%

k of bonds:11% x (1-tax rate)11% x .6 = 6.6%

k of equity: 3/50 + .08 = .14 = 14%

Weighted cost of capital:Bonds28% x .066.0185Equity72% x .14.1008Weighted cost of capital.1193 = 11.9%

Ans-5 a.kj = Rf + (km - Rf) x beta = .08 + (.14-.08) x 1.3 = .08 + .078 = .158 = 15.8%

b.If Rm remains at 14%, then risk premium is only 5%:kj = .09 + (05) x 1.3 = .09 + .065 = .155 = 15.5%

If Rm rises to 15%, the risk premium remains at 6%:kj = .09 + (.06) x 1.3 = .09 + .078 = .168 = 16.8%

c.kj = .08 + (.06) x .8 = .08 + .048 = .128 = 12.8%

Ans6- Book A

Expected profit:(.2)(2000) + (.3)(2300) + (.3)(2600) + (.2)(2900)= 2450Variance:(.2)(-450)2 + (.3)(-150)2 + (.2)(150)2 + (.3)(450)2= 94500

Standard deviation: = 307.4

Coefficient of variation:307.4/2450 = .126

Book B

Expected profit:(.1)(1500) + (.4)(1700) + (.4)(1900) + (.1)(2100)= 1800

Variance:(.1)(-300)2 + (.4)(-100)2 + (.4)(100)2 + (.1)(300)2= 26000

Standard deviation: = 161.2

Coefficient of variation:161.2/1800 = .090

The choice of Book A vs. Book B here depends on the attitude of the decision-maker toward risk. Book A has the higher profit potential but also has the higher relative risk (coefficient of variation).

Ans 7- Investment project:

Expected return: (.2)(-.05) + (.6)(.1) + (.2)(.25) = .1 = 10%

Variance: (.2)(-.15)2 + (.6)(0)2 + (.2)(.15)2 = .009

Standard deviation .009 = .094

U. S. Treasury bill:

Expected return = 3.5% Standard deviation: 0

The investment project has a significantly higher expected return but is considerably more risky. The decision would depend on how risk averse you are.

ANS 8- Project AProject BNet present value500300Standard deviation125100Coefficient of variation.25.33

Project As NPV and standard deviations are higher than Project Bs. Therefore, the coefficient of variation should be used to obtain the relative standard deviation. The coefficient of variation for project A is lower, and since its NPV is higher, Project A is the preferred choice.