Bus 320 connect homework 6
bus 320 connect homework 6 september 2013
1.
value:
1.00 points
Problem 122 Cash flow [LO2]
Assume a corporation has earnings before depreciation and taxes of $123,000 depreciation of $41,000 and is in a 35 percent tax bracket. 
(a) 
How much would cash flow be if there were only $21,000 in depreciation? All other factors are the same.(Omit the “$” sign in your response.) 
Cash flow 
$ 

B 


C 


D 


E 
[removed] 
25.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1310 Coefficient of variation and time [LO1]
Sensor Technology wishes to determine its coefficient of variation as a company over time. The firm projects the following data (in millions of dollars): 
Year 
Profits: 
Standard 

1 
$ 
93 

$ 
34 

3 

157 


65 

6 

206 


98 

9 

226 


120 

(a) 
Compute the coefficient of variation (V) for each time period. (Round your answers to 2 decimal places.) 
Year 
Coefficient of 
1 
[removed] 
3 
[removed] 
6 
[removed] 
9 
[removed] 
(b) 
Does the risk (V) appear to be increasing over a period of time? 






27.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1313 Coefficient of variation and investment decision [LO1]
Kyle’s Shoe Stores, Inc., is considering opening an additional suburban outlet. An aftertax expected cash flow of $100 per week is anticipated from two stores that are being evaluated. Both stores have positive net present values. 
Site A 

Probability 

Cash flows 


.20 



50 


.40 



100 


.25 



110 


.15 



150 

Site B 

Probability 

Cash flows 


.10 



20 


.20 



50 


.40 



100 


.20 



150 


.10 



180 

(a) 
Compute the coefficient of variation for each site. (Do not round intermediate calculations. Round your answers to 4 decimal places.) 

Coefficient of 
Site A 
[removed] 
Site B 
[removed] 
(b) 
Which store site would you select based on the distribution of these cash flows? Use the coefficient of variation as your measure of risk. 






28.
value:
1.00 points
Problem 1314 Riskadjusted discount rate [LO3]
Micro Systems is evaluating a $59,100 project with the following cash flows. 
Years 
Cash flows 

1 
$ 
9,180 

2 

13,100 

3 

21,700 

4 

19,400 

5 

25,600 

The coefficient of variation for the project is .654. 
Coefficient of variation 
Discount rate 

0 
− 
.25 

7 
% 
.26 
− 
.50 

11 

.51 
− 
.75 

15 

.76 
− 
1.00 

17 

1.01 
− 
1.25 

20 

(a1) 
Select the appropriate discount rate. 






(a2) 
Compute the net present value. Use Appendix B. (Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) 
Net present value 
$ [removed] 
(b) 
Based on the net present value should the project be undertaken? 



29.
value:
1.00 points
Problem 1316 Discount rate and timing [LO1]
(a) 
Fill in the table below from Appendix B. (Round your answers to 3 decimal places.) 

Discount rate 

Years 
10% 

18% 

1 
[removed] 

[removed] 

10 
[removed] 

[removed] 

20 
[removed] 

[removed] 

(b) 
What is the impact of a high discount rate on longterm inflows? 






30.
value:
1.00 points
Problem 1317 Expected value with net present value [LO1]
Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $22,400. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby’s cost of capital is 12 percent. 
Cash flow 
Probability 

$ 
3,890 


.3 


5,330 


.2 


8,390 


.2 


9,880 


.3 

(a) 
What is the expected value of the cash flow? (Omit the “$” sign in your response.) 
Expected cash flow 
$ [removed] 
(b) 
What is the expected net present value? Use Appendix D. (Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) 
Net present value 
$ [removed] 
(c) 
Should Debby buy the new equipment? 



31.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1318 Deferred cash flows and riskadjusted discount rate [LO3]
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,630,000 and will produce $306,000 per year in years 5 through 15 and $572,000 per year in years 16 through 25. The U.S. gold mine will cost $2,012,000 and will produce $270,000 per year for the next 25 years. The cost of capital is 10 percent. 
(a1) 
Calculate the net present value for each project. (Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the “$” sign in your response.) 

Net present value 
The Australian Mine 
$ [removed] 
The U.S. Mine 
$ [removed] 
(a2) 
Which investment should be made? 






(b1) 
If the Australian Mine justifies an extra 1 percent premium over the normal cost of capital because of its riskiness and the relative uncertainty of cash flows, recalculate the net present value of the mine.(Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) 

Net present value 
The Australian Mine 
$ [removed] 
(b2) 
Does the investment decision change? 



32.
value:
2.00 points
You did not receive credit for this question in a previous attempt
Problem 1320 Riskadjusted discount rate [LO3]
Mr. Sam Golff desires to invest a portion of his assets in rental property. He has narrowed his choices down to two apartment complexes, Palmer Heights and Crenshaw Village. After conferring with the present owners, Mr. Golff has developed the following estimates of the cash flows for these properties. 
Palmer Heights 

Yearly aftertax 

Probability 


$ 90 



.2 


95 



.2 


110 



.2 


125 



.2 


130 



.2 

Crenshaw Village 

Yearly aftertax 

Probability 


$ 95 



.2 


100 



.3 


110 



.4 


120 



.1 

Mr. Golff is likely to hold the complex of his choice for 30 years, and he will use this time period for decisionmaking purposes. Either apartment complex can be acquired for $206,000. Mr. Golff uses a riskadjusted discount rate when considering investments. His scale is related to the coefficient of variation. 
Coefficient of variation 
Discount rate 


0 
– 
0.20 

5 
% 

0.21 
– 
0.40 

8 

(cost of capital) 
0.41 
– 
0.60 

12 


Over 0.60 

16 



(a) 
Compute the riskadjusted net present values for Palmer Heights and Crenshaw Village. (Omit the “$” sign in your response.) 

Net present value 
Palmer Heights 
$ [removed] 
Crenshaw Village 
$ [removed] 
(b1) 
Which investment should Mr. Golff accept if the two investments are mutually exclusive? 






(b2) 
Which investment should Mr. Golff accept If the investments are not mutually exclusive and no capital rationing is involved? 






33.
value:
1.00 points
Problem 1321 Decisiontree analysis [LO4]
Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere sweater market with a new line of highquality designer label products. The marketing department has determined that the wool and cashmere sweater lines offer the following probability of outcomes and related cash flows. 

EXPAND WOOL SWEATERS LINE 

ENTER CASHMERE SWEATERS LINE 

Expected sales 
Probability 
Present value 

Probability 
Present value 

Fantastic 

.3 

$ 
262,000 



.3 

$ 
378,000 

Moderate 

.3 


194,000 



.3 


239,000 

Low 

.4 


88,100 



.4 


0 

The initial cost to expand the wool sweater line is $161,000. To enter the cashmere sweater line the initial cost in designs, inventory, and equipment is $136,000. 
(a) 
Calculate Net present value. (Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.) 

Net present value 
Expand wool sweaters line 
$ [removed] 
Enter cashmere sweaters line 
$ [removed] 
34.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1322 Probability analysis with a normal curve distribution [LO4]
When returns from a project can be assumed to be normally distributed (represented by a symmetrical, bellshaped curve), the areas under the curve can be determined from statistical tables based on standard deviations. For example, 68.26 percent of the distribution will fall within one standard deviation of the expected value ( ± 1σ). Similarly 95.44 percent will fall within two standard deviations ( ± 2σ), and so on. An abbreviated table of areas under the normal curve is shown here. 
Number of σ’s 
+ or – 

+ and – 



.50 

.1915 

.3830 


1.00 

.3413 

.6826 


1.50 

.4332 

.8664 


1.75 

.4599 

.9198 


2.00 

.4772 

.9544 

Assume Project A has an expected value of $34,000 and a standard deviation ( σ ) of $6,800. 
(a) 
What is the probability that the outcome will be between $23,800 and $44,200? (Round your answer to 4 decimal places.) 
Probability 
[removed] 
(b) 
What is the probability that the outcome will be between $20,400 and $47,600? (Round your answer to 4 decimal places.) 
Probability 
[removed] 
(c) 
What is the probability that the outcome will be at least $20,400? (Round your answer to 4 decimal places.) 
Probability 
[removed] 
(d) 
What is the probability that the outcome will be less than $45,920? (Round your answer to 4 decimal places.) 
Probability 
[removed] 
(e) 
What is the probability that the outcome will be less than $30,600 or greater than $40,800? (Round your answer to 4 decimal places.) 
Probability 
[removed] 
35.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1323 Increasing risk over time [LO1]
The Oklahoma Pipeline Company projects the following pattern of inflows from an investment. The inflows are spread over time to reflect delayed benefits. Each year is independent of the others. 
Year 1 

Year 5 

Year 10 




Cash inflow 
Probability 

Cash inflow 
Probability 

Cash inflow 
Probability 


35 


.40 



20 


.35 



50 


.40 


60 


.20 



60 


.30 



60 


.40 


85 


.40 



100 


.35 



110 


.20 

The expected value for all three years is $60. 
(a) 
Compute the standard deviation for each of the three years. (Round your answers to 2 decimal places.) 

Standard deviation 
Year 1 
[removed] 
Year 5 
[removed] 
Year 10 
[removed] 
36.
value:
1.00 points
Problem 1324 Portfolio effect of a merger [LO5]
Treynor Pie Co. is a food company specializing in highcalorie snack foods. It is seeking to diversify its food business and lower its risks. It is examining three companies—a gourmet restaurant chain, a baby food company, and a nutritional products firm. Each of these companies can be bought at the same multiple of earnings. The following represents information about the companies. 
Company 
Correlation with 
Sales 
Expected earnings($ millions) 
Standard deviation 

Treynor Pie Company 
+ 
1.0 

$ 
182 

$ 
9 

$ 
3.0 

Gourmet restaurant 
+ 
.5 


63 


9 


1.2 

Baby food company 
+ 
.3 


54 


6 


1.7 

Nutritional products company 
− 
.6 


75 


7 


3.8 

(a1) 
Compute the coefficient of variation for each of the four companies. (Round your answers to 2 decimal places.) 

Coefficient of 
Treynor Pie Company 
[removed] 
Gourmet restaurant 
[removed] 
Baby food company 
[removed] 
Nutritional products company 
[removed] 
(a2) 
Which company is the least risky? 






(a3) 
Which company is the most risky? 






(b) 
Which of the acquisition candidates is most likely to reduce Treynor Pie Company’s risk? 






37.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1325 Portfolio effect of a merger [LO5]
Transoceanic Airlines is examining a resort motel chain to add to its operation. Prior to the acquisition, the normal expected outcomes for the firm are as follows: 

Outcomes 
Probability 

Recession 
$ 
35 


.40 

Normal economy 

55 


.20 

Strong economy 

75 


.40 

(a) 
Compute the expected value, standard deviation, and coefficient of variation. (Enter your answer in millions. Round Standard deviation to 2 decimal places and final answer to 3 decimal places.Omit the “$” sign in your response.) 


Expected value 
$ [removed] 
Standard deviation 
$ [removed] 
Coefficient of variation 
[removed] 
38.
value:
1.00 points
You did not receive credit for this question in a previous attempt
Problem 1327 Certainty equivalent approach [LO1]
Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the family business, Goodman Software Products, Inc., as vice president of finance. 
She believes in adjusting projects for risk. Her father is somewhat skeptical but agrees to go along with her. Her approach is somewhat different than the riskadjusted discount rate approach, but achieves the same objective. 
She suggests that the inflows for each year of a project be adjusted downward for lack of certainty and then be discounted back at a riskfree rate. The theory is that the adjustment penalty makes the inflows the equivalent of riskless inflows, and therefore a riskfree rate is justified. 
A table showing the possible coefficient of variation for an inflow and the associated adjustment factor is shown below: 
Coefficient of 
Adjustment 

0 
– 
.25 

.90 

.26 
– 
.50 

.80 

.51 
– 
.75 

.70 

.76 
– 
1.00 

.60 

1.01 
– 
1.25 

.50 

Assume a $180,000 project provides the following inflows with the associated coefficients of variation for each year. 
Year 
Inflow 
Coefficient of variation 

1 
$ 
31,800 


.15 

2 

53,200 


.23 

3 
77,000 
.52 

4 
59,100 
.71 

5 

66,100 


1.10 

(a) 
Fill in the table below (Round “Adjustment factor” to 2 decimal places. Omit the “$” sign in your response): 
Year 
Adjustment factor 
Adjusted Inflow 
1 
[removed] 
$ [removed] 
2 
[removed] 
[removed] 
3 
[removed] 
[removed] 
4 
[removed] 
[removed] 
5 
[removed] 
[removed] 
(b1) 
If the riskfree rate is 5 percent, compute the net present value of the adjusted inflows. Use Appendix B. (Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest whole dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) 
Net present value 
$ [removed] 
(b2) 
Should this project be accepted? 


