Part 1

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

b) Future value = PV (1+r)^3 =  331.20* ( 1+0.08)^3 = $ 417.22.

c) Interest Component = Future Value -Present Value = $ 417.22 - $ 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 2: Compute the carrying value at the end of 18th Month

Carrying Value = 10,386.91/(0.135/12) * 1 - 1/(1+(0.135/12))^162

Carrying Value = 923,282.89 * 0.48
Carrying Value = 772,506.23

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

b) Compute the new term of the loan

Present Value = Payments * (1 - (1 + r/n)^-tn) / (r/n)
772,506.23 = 10386.55 * (1 - (1 + .15/12)^-x*12) / (.15/12)
74.38 = (1 - (1 + .15/12)^-12x) / (.15/12)
0.93 = 1 - 1.0125^-12x
1.0125^-12x = 1 - 0.93
1.0125^-12x = 0.07
Taking Log
log1.0125 0.07 = -12x
-12x = log(0.07) / log(1.0125)
-12x = -214.07
x = 17.84
Therefore, new term of loan 17.84 years or 214 months
8)^3 = $ 417.22.

alue = $ 417.22 - $ 331.20 = $ 86.02

= 86.02/ 331.20 *100 = 25.97%

Year 0 have an effective time of 1,

alue and future value. It means

ue. Whereas the low interest rate
12) / (0.135/12)

/(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%

b. Estimate the free cash flows of the project

Year 0 Year 1 Year 2 Year 3

Sales revenue $ 3,000,000 $ 3,500,000 $ 3,250,000

Depreciation $   (800,000) $   (800,000) $   (800,000)

Charges of Lease Cancellation $       150,000 $       150,000

Sales Promotion Expenses $     500,000

Net Working Capital $     225,000 $     225,000 $     225,000
Gross Margin $     (150,000) $ 3,075,000 $ 4,075,000 $ 3,825,000
Corporate Tax-35% $1,076,250 $ 1,426,250 $ 1,338,750

Resale amount of Equipment

Total cash flow $     (150,000) $1,076,250 $ 1,426,250 $ 1,338,750

New cost of Equipment ($4,000,000)

C.  What is the net present value (NPV) and internal rate of return (IRR) of the p

Year 0 Year 1 Year 2 Year 3

Sales revenue $ 3,000,000 $ 3,500,000 $ 3,250,000

Depriciation $   (800,000) $   (800,000) $   (800,000)

lease cancellation charges $       150,000
sales promotion expenses $     500,000
net working capital $     225,000 $     225,000 $     225,000
Gross income $     (150,000) $ 3,075,000 $ 4,075,000 $ 3,825,000
corporate tax @ 35% $ 1,076,250 $ 1,426,250 $ 1,338,750

Resale value

Total cash flow $     (150,000) $ 1,076,250 $ 1,426,250 $ 1,338,750

PV factor @6% 1 0.943 …. 0.84
NPV $     (150,000) $ 1,014,904 $ 1,269,363 $ 1,124,550
Total NPV $   5,968,840
New equipment cost $ (4,000,000)
Net NPV $   1,968,840
IRR 13.58%

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

$   (800,000) $   (800,000)

$     225,000 $     225,000

$ 3,575,000 $ 2,075,000
$ 1,251,250 $     726,250

$ 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.
Design an Excel financial model that can help to evaluate this investment plan. Marks will be allocated for the presentation an

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Based on the responses in part (b), calculate the average daily stock returns and standard deviation for each stock.

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nswer the following questions: