1. Calculate the PVs of depreciation tax shields in the five-year and seven-year classes shown in Table 6.4. Assume the tax rate is 35% and the discount rate is 10%. Lastly, assume the asset in question costs $1. (Do not round intermediate calculations. Round your answers to 3 decimal places.)
Present Value
Five year
Seven year
2. The following table tracks the main components of working capital over the life of a four-year project.
2010
2011
2012
2013
2014
Accounts receivable
150,000
225,000
190,000
Inventory
75,000
130,000
130,000
95,000
Accounts payable
25,000
50,000
50,000
35,000
Calculate net working capital and the cash inflows and outflows due to investment in working capital. (Negative amounts should be indicated by a minus sign. Leave no cells blank – be certain to enter 0 wherever required.)
2010
2011
2012
2013
2014
Working capital
Cash flows
3. Machines A and B are mutually exclusive and are expected to produce the following real cash flows:
Cash Flows ($ thousands)
Machine
C0
C1
C2
C3
A
–100
+110
+121
B
–120
+110
+121
+133
The real opportunity cost of capital is 10%. (Use PV table.)
a.
Calculate the NPV of each machine. (Do not round intermediate calculations. Round your answers to the nearest thousand.)
Machine
NPV
A
$
B
$
b.
Calculate the equivalent annual cash flow from each machine. (Do not round intermediate calculations. Round “PV Factor” to 3 decimal places and final answers to the nearest thousand.)
Machine
Cash flow
A
$
B
$
c.
Which machine should you buy?
Machine A
Machine B
4. A game of chance offers the following odds and payoffs. Each play of the game costs $100, so the net profit per play is the payoff less $100.
Probability
Payoff
Net Profit
0.10
$500
$400
0.50
100
0.40
–100
a-1.
What is the expected cash payoff?
Expected cash payoff
$
a-2.
What is the expected rate of return?
Expected rate of return
%
b-1.
Calculate the variance of this rate of return. (Ignore the technical point referred to in footnote 16).(Round your answer to the nearest whole number.)
Variance
b-2.
Calculate the standard deviation of this rate of return. (Ignore the technical point referred to in footnote 16). (Round your answer to the nearest whole percent.)
Standard deviation
%
5. Consider the following information:
Stock Return if Market Return Is:
Stock
–10%
+10%
A
+20
B
–20
+20
C
–30
D
+15
+15
E
+10
–10
What is the beta of each of the stocks? (Leave no cells blank – be certain to enter “0” wherever required. Negative values should be indicated by a minus sign. Round your answers to 1 decimal place.)
Stock
Beta
A
B
C
D
E
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