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Net Present Value-Unequal Lives Al a Mode, Inc., is considering one of two investment options. Option 1 is a $34,000 investment in new blending equipment that is expected to produce equal annual cash flows of $10,000 for each of seven years. Option 2 is a $35,000 investment in a new computer system that is expected to produce equal annual cash flows of $13,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $7,000. The computer system has no expected residual value at the end of the fifth year. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects, assuming a minimum rate of return of 10%. Use the present value tables appearing above. a. Determine the net present values of the two projects. Blending Equipment Computer System Total present value of cash flows $ $ Less amount to be invested $ $ Net present value $ $ b. Determine the present value indices of the two projects. If required, round the present value index to two decimal places. Present Value Index Blending Equipment Computer System Which project should be selected? (If both present value indices are the same, either project will grade as correct.)
The current exchange rate is 0.93 euros per dollar, but you believe the dollar will decline to 0.85 Euros per dollar. If a euro-denominated bond is yielding 2%, what return do you expect in U.S. dollars?
What are the primary functions served by investment bankers? What are the differences between a direct placement, a public cash offering, and a rights offering of securities?
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The state of Alabama has legally earmarked around 85 percent of its state budget.
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In isolation, stock A’s standard deviation ( σ ) = 10%, stock B’s σ = 15%, and stock C’s σ = 20%. In a portfolio, stock A’s beta ( β ) = 2, stock B’s β = 1.5, and stock C’s β = 1.0. Which of the following is true?
Puckett Products is planning for $2.1 million in capital expenditures next year. Puckett's target capital structure consists of 40% debt and 60% equity. If net income next year is $3 million and Puckett follows a residual distribution policy with all..
From the perspective of a Wall Street analyst or portfolio manager, interpret the following hypothetical statements: "Money markets are not used to get rich, but to avoid being poor." "Until conditions are more favorable, investors are staying on the..
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