interest rate of š percent, how much will he have saved by age 60? 1. a. Calcula

Question

interest rate of š percent, how much will he have saved by age 60? 1. a. Calculate (write down a formula) the net present value of the following project for discount rates of 0, 30, and 100 percent: Cash Flows (S) CO -6,750 CI 4,500 C2 18,000 2. What is the IRR of the project (write down a formula)? 3. Suppose you have the following investment opportunities, but only $120,000 available for investment. Which projects should you take? Project NPV Investment 30,000 5,000 2 5,000 10,000 15,000 15,000 3,000 40,000 55,000 25,000 4.Calculate WACC. e of Estimate the cost of equity through CAPM. Company's beta is market portfolio rate of return is 20%, risk-free rate of return is 8%. 5. What is VaR? How it can be calculated? 6·Construct after-tax cash flows, working capital is estimated as 30% of sales. 3000000 36000004200000 450000ol 000000 Salaries 00000330000360000 390000 400000 Raw Material 1700000 2000000 240000025000003000000 Income Income ABer Tase apital Expenditure 7. Harold Filbert is 30 years of age and his salary next year will be $20,000. Harold forecasts that his salary will increase at a steady rate of 5 percent per annum until his retirement at age 60. a. If the discount rate is 8 percent, what is the PV of these future salary payments? b. If Harold plans to spend these savings in even amounts over the subsequent 20 years, how much can he spend each year?

Explanation / Answer

1. NPV is the sum of present value of initial cash outflows and future cash inflows. The cash flows are discounted using the appropriate interest rate. If the discount rate is denoted by 'r', then NPV for this case will be :

NPV = C0 / (1+r)0 + C1/(1+r) + C2/(1+r)2

Plugging in the values, we can calculate the NPV for various given discount rates:

NPV (r=0) = -6750 + 4500 / (1+0) + 18000/ (1+0)2 = 15750

NPV (r=30%) = -6750 + 4500 / (1+30%) + 18000/ (1+30%)2 = 7362.43

NPV (r=100%) = -6750 + 4500 / (1+100%) + 18000/ (1+100%)2 = 0

2. The IRR is simply the discount rate at which the NPV equals zero. We can calculate IRR by equating NPV equation to zero and solving for discount rate. In the above case, as we see that the NPV became zero at 100% discount rate hence its IRR is 100%

C0 / (1+r)0 + C1/(1+r) + C2/(1+r)2 = 0 ; the value of r which will make the NPV zero is IRR.

3. We should projects such that the cumulative NPV is the highest. We can do this by dividing the NPV by initial investment and then ranking the project is descending order of the ratio:

In descending order of the ratio, we choose projects till the cumulative initial invesment is within $120,000. Hence we will choose Projects 2, 4 and 5 which will total to $100,000 and give NPV of $35000.

4. We first calculate the cost of equity using CAPM.

Cost of Equity (RE) = risk free rate (RF) + Beta * (Market Return (RM) - RF)

RE = 8% + 1.1 * (20% - 8%) = 21.20%

Now we can calculate the weights of equity, Loan 1 and Loan 2 :

WE = 10000 / (4000+6000+10000) = 0.50

WL1 = 4000/20000 = 0.20

WL2 = 6000/20000 = 0.30

WACC = 0.50 * 21.20% + 0.20 * 14% + 0.3 * 16% = 18.20%

Project Initial Investment NPV NPV/Investment Ratio 1 30000 5000 0.17 2 5000 5000 1 3 100000 10000 0.10 4 40000 15000 0.38 5 55000 15000 0.27 6 25000 3000 0.12

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