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A) Year 0 Year 1 Year 2 Year 3
A) Year 0 Year 1 Year 2 Year 3
A) Year 0 Year 1 Year 2 Year 3
As the payments are made at end of each year, it means the cash flow of current (zero) year
has effective time of 1, cash flow of next year (1) has effective time of (1+1=2) 2 , and hence
it will move forward.
a)
Year 0 Year 1 Year 2 Year 3
Effective time 1 2 3 4
Cash Flow $100 $100 $100 $100
Factor (1.08) (1.08)^2 (1.08)^3 (1.08)^4
Present Value of cash flow @ 8% $ 92.59 $ 85.73 $ 79.38 $ 73.50
Total Present Value of cash flow $ 331.20
d) Effect rate = Interest / Principle Amount *100 = 86.02/ 331.20 *100 = 25.97
Part 2
a)
As the payments made by Uncle are done after year end, therefore the cash flows of Year 0 have an effective time
cash flow for year 2 has a time of 2, that is (1+1) and so on.
Year 0 Year 1 Year 2 Year 3
Effective time 1 2 3 4
Cash Flow $15,000 $15,000 $15,000 $15,000
Factor (1.07) (1.07)^2 (1.07)^3 (1.07)^4
Present Value of cash flow @ 7% $ 14,018.69 $ 13,101.58 $ 12,244.47 $ 11,443.43
Total Present Value of cash flow $ 50,808.17
b)
Year 0 Year 1 Year 2 Year 3
Effective time 1 2 3 4
Cash Flow $15,000 $15,000 $15,000 $15,000
Factor (1.08) (1.08)^2 (1.08)^3 (1.08)^4
Present Value of cash flow @ 8% $ 13,888.89 $ 12,860.08 $ 11,907.48 $ 11,025.45
Total Present Value of cash flow $ 49,681.90
c)
As the interest rate and the effective term are the two factors that affect the present value and future value. It mean
that the high interest rate result in lower Present Value and the increased Future Value. Whereas the low interest r
result in higher Present Value and lower Future Value.
Part 3
a)
Step 1: Compute the current monthly payment using 13.5% annual interest rate
Present V alue = Payments * (1 - (1 + r/n)-tn) / (r/n)
800,000 = Payments * (1 - (1 + 0.135/12)-15*12) / (0.135/12)
800,000 = Payments * (1 - 1.01125-180) / 0.01125
800,000 = Payments * 77.02
Payments = 800,000 / 77.02
Payments = 10,386.55
Step 3: Compute new monthly payment using 15% interest rate & 13.5 years term of loan
Present Value = Payments * (1 - (1 + r/n)^-tn) / (r/n)
772,506.23 = Payments * (1 - (1 + .15/12)^-13.5*12) / (.15/12)
772,506.23 = Payments * (1 - 1.0125-162) / .0125
772,506.23 = Payments * 69.31
Payments = 772,506.23 / 69.31
Payments = 11,145.67
/(1+(0.135/12))^162
rm of loan
.5*12) / (.15/12)
12) / (.15/12)
Part a
Weighted Average Cost of Capital
WACC = (0.5 * 0.5*18%) + (0.5*10%)
WACC = 0.045 + 0.05
WACC = 0.095
WACC = 9.50%
C. What is the net present value (NPV) and internal rate of return (IRR) of the p
Resale value
d. Draw a line graph to explain the sensitivity of the NPV to changes in WACC
Year 4 Year 5 3,500,000
$ 3,000,000 $ 1,500,000 - 800,000 3,000,000
$ (800,000) $ (800,000)
150,000 - 800,000
500,000 500,000
225,000
$ 225,000 $ 225,000
$ 3,575,000 $ 2,075,000 1,426,250 3,075,000 1,076,250
$ 1,251,250 $ 726,250 - 1,076,250
$ 1,575,000
- 300,000
$ 1,251,250 $ 2,301,250 3,000,000
e of return (IRR) of the project? Should Frank Stone Company undertake the project based on NPV? How about IRR? Do bo
Year 4 Year 5
$ 3,000,000 $ 1,500,000
$ 1,575,000
$ 1,251,250 $ 2,301,250
0.792 0.747
$ 990,990 $ 1,719,034
NPV to changes in WACC? The graph should have a chart title, as well as x- and y-axis labels.
1,998,750
2,700,000
2,925,000 3,075,000 150,000
PV? How about IRR? Do both NPV and IRR lead to the same decision
a.
b.
c.
d.
e.
f.
g.
h.
i.
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