# Questions

Question 1

1. Early Saver:

FVA10 = \$1,000(FVIFA8%, 10) = \$1,000(14.487) = \$14,487

FV40 = \$14,487(FVIF8%, 40) = \$14,487(21.725) = \$314,730.08

Late Saver: FVA40 = \$1,000(FVIFA8% ,40) = \$1,000(259.057) = \$259,057

1. b) The Early Saver brother’s investment program is better off or worth more as he began saving sooner than later. He is better off by (\$314,730.08-\$259,057) \$55,673.08.

Question 2

1. Value of stock = D1/ (k – g)

= \$2.00/(0.14-0.04) = \$20

1. Value of stock = D1/ (k – g)

40 = 2.00/ (k – 0.04)

40((k – 0.04) = 2.00

40k – 1.6 = 2.00

k= 0.09

Required rate of return = 9%

Question 3

Value of the bond       = PV of annuity + PV of single cash flow

PV of annuity                         = Interest*PVIFA6%, 30 years

= (0.04*1000)*13.765 = \$550.60

PV of single cash flow            = Face value*PVIF6%, 30years

=1000*0.17411= \$174.11

Value of the bond= \$550.60 + \$174.11 = \$724.71

Question 4

Expected return (mean), μ = 15 and standard deviation σ = 25.

1. less than 20%

For x = 20, the z-value z = (20 – 15) / 25 = 0.2

Hence P(x < 20) = P(z < 0.2) = [area to the left of 0.2] = 0.5793

1. more than 5%

For x = 5, the z-value z = (5 – 15) / 25 = -0.4

Hence P(x ˃ 5) = P(z ˃ -0.4) = [area to the right of -0.4] = 0.3446

P(x ˃ 5) = 1.00-0.3446 = 0.6554

Question 5

1. Calculation of the relevant cash flow
 Item Initial 1st Year 2nd Year 3rd Year 4th Year 5th Year Purchase of the new equipment -70000 After-tax production savings (1-0.4)*26000 15600 15600 15600 15600 15600 Depreciation 23331 31115 10367 5187 0 Depreciation tax savings (0.4*depreciation expense) 9332.4 12446 4146.8 2074.8 0 Terminal year cash flow Salvage value 10000 Tax on Salvage value 0.4(10000-5187) 1925.2 8074.8 Net cash flow -70000 24932.4 28046 19746.8 17674.8 23674.8 BV in year 4 \$70000*0.0741 = 5187

1. Calculation of NPV and PI
 Year Net Cash flow PV @ 12% 0 -70000 -70,000 1 24932.4 22,262.14 2 28046 22,358.27 3 19746.8 14,055.77 4 17674.8 11,232.34 5 23674.8 13,433.08 NPV 13,342

PI

Profitability Index = (NPV + Initial investment) ÷ Initial Investment

PI = (70000+13342)/70000 = 1.191

1. The project should be accepted because it has a negative NPV (\$13,342) and a PI of more than one.
Get a 10 % discount on an order above \$ 100
Use the following coupon code :
SKYSAVE