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You are considering two projects: Project 1 and Project 2. Both projects will return an annuity after an initial investment in the project. You know from your finance course that the present value of an annuity (that is, a payment made every year in perpetuity) is equal to
PV= A r where A = annual return per year and r = discount rate.
You only have time and personnel to select one project; that is, these two projects are mutually exclusive. Assume that the discount rate (r) is 13 percent. The first project (Project 1) has an initial investment of $100,000 but returns an amount (A) of $24,000 per year forever starting at the end of the first year. The second project (Project 2) has an initial investment of $1000 but returns $4000 per year (forever) beginning at the end of the first year.
For both projects, calculate the Payback period, NPV, IRR, and PI (profitability index). Based on these metrics, which project would be more attractive if you could only select one project? Support your answer.
Consider the following spot interest rates for maturities of one, two, three, and four years. r1 = 3.8% r2 = 4.2% r3 = 4.9% r4 = 5.7% Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next ..
Suppose that Lil John Industries’ equity is currently selling for $45 per share and that 3.8 million shares are outstanding. The firm also has 68,000 bonds outstanding, which are selling at 103 percent of par. Assume Lil John was considering an activ..
Hekinan Corporation has bought 4000 barrels of Brent crude oil $112.63 a barrel. It has sold call options on 2000 barrels of oil, with exercise price $110, for $5.50 each; and options on 1000 barrels of oil, exercise price $115, for $1.80 each. Calcu..
An investor buys a European put on a share for $1. The stock price is currently $21 and the strike price is $17. When does the investor make a profit?
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He is willing to buy your C$200 for 1500 New Pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.
Clay LLC placed in service machinery and equipment (7-year property) with a basis of $2,310,000 on June 6, 2015. Assume that Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ign..
Jemisen's firm has expected earnings before interest and taxes of $1,400. Its unlevered cost of capital is 15 percent and its tax rate is 35 percent. The firm has debt with both a book and a face value of $2,000. This debt has a 7 percent coupon and ..
Winnebagel Corp. currently sells 18,000 motor homes per year at $27,000 each, and 7,200 luxury motor coaches per year at $51,000 each. The company wants to introduce a new portable camper to fill out its product line; What is the amount to use as the..
With a tax rate of 40% and a total capital structure of $10,000,000. We need to calculate the WACC for the following two scenarios. Composition of capital structure. Which is the best for option for the company? Explain.
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