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Interest and discount rates

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solution


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Question #1: The satisfied owner of a new $15,000 car can be expected to buy another ten cars from the same company over the next 30 years (an average of one every three years) at an average price of $15,000 (ignore the effects of inflation). If the net profit margin on these cars is 20%, how much should an auto manufacturer be willing to spend to keep its customers satisfied? Assume a 9% discount rate.;Question #2: The Fun Foods Corporation must decide on what new product lines to introduce next year. After-tax cash flows are listed in the attached file along with initial investments. The firm's cost of capital is 12% and its target accounting rate is 20%. Assume straight-line depreciation and an asset life of five years. The corporate tax rate is 35%. All projects are independent.;a. Calculate the accounting rate of return on the project. Which projects are acceptable according to this criterion? (Note: Assume net income is equal to after-tax cash flow less depreciation.);b. Calculate the payback period. All projects with a payback of fewer than four years are acceptable. Which are acceptable according to this criterion?;c. Calculate the projects' NPVs. Which are acceptable according to this criterion?;d. Calculate the projects' IRRs. Which are acceptable according to this criterion?;e. Which projects should be chosen?;Attachment Preview;Question #2 Info.xlsx Download Attachment;Project;A;B;C;Investment;$5,000;$7,500;$4,000;Year 1;$800;$1,250;$600;Year 2;$1,000;$3,000;$1,200;Year 3;$350;$2,500;$1,200;Year 4;$1,250;$5,000;$2,400;Year 5;$3,000;$5,000;$3,000

 

Paper#18163 | Written in 18-Jul-2015

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