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# 1.  Tim Smith is shopping for a used luxury car. He has found one priced at...

## Question

###### 1.  Tim Smith is shopping for a used luxury car. He has found one priced at...

1. Tim Smith is shopping for a used luxury car. He has found one priced at \$36,000. The dealer has told Tim that if he can come up with a down payment of \$5,500​, the dealer will finance the balance of the price at a 8​% annual rate over 2 years (24 months).  (Hint: Use four decimal places for the monthly interest rate in all your calculations.)

a.  Assuming that Tim accepts the​ dealer's offer, what will his monthly​ (end-of-month) payment amount​ be?

b.  Use a financial calculator or spreadsheet to help you figure out what​ Tim's monthly payment would be if the dealer were willing to finance the balance of the car price at an annual rate of 3.5​%?

2. What is the rate of return on an investment of \$10,557 if the investor will receive \$2,400 each year for the next 8 years?

3. Find the value of a bond maturing in 11 years, with a \$1,000 par value and a coupon interest rate of 12​% (6​% paid​ semi-annually) if the required return on​ similar-risk bonds is 16​% annual interest (8% paid​ semiannually).

4. The bond shown in the following table pays interest annually.

​

 Par value Coupon interest rate Years to maturity Current value ​\$100 12​% 20 ​\$130

Calculate the yield to maturity (YTM​) for the bond.

5. Melissa is trying to value the stock of Generic​ Utility, Inc., which is clearly not growing at all. Generic declared and paid a ​\$5 dividend last year. The required return for utility stocks is 8​%, but Melissa is unsure about the financial reporting integrity of​ Generic's finance team. She decides to add an extra 2​% "credibility" risk premium to the required return as part of her valuation analysis.

a.  What is the value of​ Generic's stock, assuming that the financials are​ trustworthy?

b.  What is the value of​ Generic's stock, assuming that Melissa includes the extra 2​% "credibility" risk​ premium?

c.  What is the difference between the values found in parts a and b, and how might one interpret that​ difference?

6. The Ball Shoe Company is considering an investment project that requires an initial investment of \$537,000 and returns​ after-tax cash inflows of 96,166 per year for 10 years. The firm has a maximum acceptable payback period of 8 years.

a.  Determine the payback period for this project.

b.  Should the company accept the​ project?

7. Herky Foods is considering acquisition of a new wrapping machine. By purchasing the​ machine, Herky will save money on packaging in each of the next 5​ years, producing the series of cash inflows shown in the following​ table:

Year     Cash Flow

1          \$ 595,200

2          \$ 558,000

3          \$ 446,400

4          \$ 520,800

5          \$ 297,600

The initial investment is estimated at \$1.86 million. Using a 7​% discount​ rate, determine the net present value (NPV) of the machine given its expected operating cash inflows. Based on the ​project's NPV​, should Herky make this​ investment?

8. Neil Corporation has three projects under consideration. The cash flows for each of them are shown in the following​ table:

 Project A Project B Project C Initial investment: \$30,000 \$30,000 \$30,000 Year: 1 \$11,000 \$9,000 \$13,000 2 \$11,000 \$10,000 \$12,000 3 \$11,000 \$11,000 \$11,000 4 \$11,000 \$12,000 \$10,000 5 \$11,000 \$13,000 \$9,000

The firm has a cost of capital of 18%.

a. Calculate each​ project's payback period. Which project is preferred according to this​ method?

b. Calculate each​ project's net present value (NPV). Which project is preferred according to this​ method?

c. Comment on your findings in parts a and b​, and recommend the best project. Explain your recommendation.

9. Thomas Company is considering two mutually exclusive projects. The​ firm, which has a cost of capital of 13​%, has estimated its cash flows as shown in the following​ table:

 Project A Project B Initial investment: \$130,000 \$100,000 Year: 1 \$15,000 \$55,000 2 \$30,000 \$40,000 3 \$45,000 \$30,000 4 \$60,000 \$5,000 5 \$70,000 \$15,000

a.  Calculate the NPV of each​ project, and assess its acceptability.

b.  Calculate the IRR for each​ project, and assess its acceptability.

10. The​ High-Flying Growth Company​ (HFGC) has been expanding very rapidly in recent​ years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 24​%, and HFGC managers believe that 24​% is a reasonable figure for the​ firm's cost of capital. To sustain a high growth​ rate, HFGC's CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the​ firm's production​ capacity, and the second project involves introducing one of the​ firm's existing products into a new market. Cash flows from each project appear in the following​ table:

 Year Plant Expansion Product Introduction 0 -\$3,100,000 -\$500,000 1 \$2,750,000 \$375,000 2 \$1,750,000 \$300,000 3 \$1,500,000 \$300,000 4 \$2,250,000 \$3755,000

a.  Calculate the NPV for both projects. Rank the projects based on their NPVs.

b.  Calculate the IRR for both projects. Rank the projects based on their IRRs.

c.  Calculate the PI for both projects. Rank the projects based on their PIs.

d.  The firm can only afford to undertake one of these investments. What should the firm do?

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