FINC400 full course (American Public university)

name-finc400-5.xlsx

Instructions

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Week 5 Homework Problems

Complete the following problems:

Problem 12-10

Problem 13-3

Problem 12-13

Problem 13-10

Problem 12-21

Problem 13-15

Master 11/2011 kt

Problem 12-10 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
				Solution:		Show your work!
				a) Payback Method
Diaz Camera Company				Payback for A		Years
Project A		$10,000
Project B		$10,000
Cost of Capital		10%		Payback for B		Years
Year	Project A	Project B
1	$6,000	$5,000
2	$4,000	$3,000
3	$3,000	$8,000
b) NPV METHOD
	Project A		Present		Project B		Present
Year	Cash Flow	PVIF @ 10%	Value	Year	Cash Flow	PVIF @ 10%	Value
1				1
2				2
3				3
	Present Value of Inflows =					Present Value of Inflows =
	Present Value of Outflows =					Present Value of Outflows =
	Net Present Value =					Net Present Value =
c) Should a firm normally have more confidence in answer a or answer b? Explain.

Problem 12-13 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Homeland Security Systems		Solution:			Show your work!
Equipment	$40,000		STEP 1:	Average the inflows
Year	Cash Flow
1	$20,000
2	$18,000
3	$13,000
			STEP 2:	Divide investment by annuity from step 1
			STEP 3:	Find the rate that corresponds to the value in Step 2:
			STEP 4:	Calculate the Present Value at 14%
				Because the inflows are biased toward the early years, we will use the higher rate of 14%.
			Year	Cash Flow	PVIF @ 14%	Present Value
			1
			2
			3
			STEP 5:	Calculate the Present Value at 15%
				Since the NPV is slightly over $40,000, we need to try a higher rate. We will try 15%.
			Year	Cash Flow	PVIF @ 15%	Present Value
			1
			2
	INTERPOLATION:		3
					PV @ 14%
					PV @ 15%
					PV @ 14%
					Cost
			IRR =
			b)	With a cost of capital of 12 percent, should the machine be purchased?
			Explain:

Problem 12-21 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Caffeine Coffee Company		Solution:
Investment	$27,000	a)	Year	Inflows	Rate	Number	FVIF	Future
Cost of Capital	12%					of Periods		Value
			1
Year	Cash Inflows		2
1	$15,000		3
2	$12,000
3	$9,000			PVIF =
		b)

Problem 13-3 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
	Northern Wind Power			Solution:
	Possible Market Reaction	Sales	Probabilities	a)
		in Units
	Low Response	50	0.10		D	P	DP
	Moderate Response	70	0.40
	High Response	90	0.20
	Very High Response	140	0.30
								=
b)	D				P	P
	50
	70
	90
	140
			=	0.00

Problem 13-10 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
	Sensor Technology			Solution:
	Year	Profits:	Standard	Coefficient of
		Expected Value	Deviation	Variation
	1	$90	$31
	3	$120	$52
	6	$150	$83
	9	$200	$146
Explain: b)

Problem 13-15 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Payne Medical Labs			Solution:		Product 1
Years	Product 1	Product 2		Year	Inflows	PVIF @ 10%	PV
1	$25,000	$16,000		1	$25,000
2	$30,000	$22,000		2	$30,000
3	$38,000	$34,000		3	$38,000
4	$31,000	$29,000		4	$31,000
5	$19,000	$70,000		5	$19,000
						PV of Inflows
Additional Information						Investment	$90,000
Discount Rate - Product 1		10%				Net Present Value
Discount Rate - Product 2		15%
Investment		$90,000		Product 2
				Year	Inflows	PVIF @ 15%	PV
				1	$16,000
				2	$22,000
				3	$34,000
				4	$29,000
				5	$70,000
						PV of Inflows
						Investment	$90,000
						Net Present Value
		Which product should be selected using net present value analysis?

DDP

(D D)

(DD)

(

)

D DP