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BUSI 320 Week 6 Fall 2104 Corporate Finance-Assume a corporation has earnings before depreciation and taxes of $113,000

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Question;1.11/24/14, 1:15 AMaward:1.00 pointAssume a corporation has earnings before depreciation and taxes of $113,000, depreciation of $40,000,and that it has a 30 percent tax bracket.a. Compute its cash flow using the following format. (Input all answers as positive values.)Earnings before depreciation and taxesDepreciation$ 113000Earnings before taxesTaxes$ 73000Earnings after taxesDepreciation$ 51100Cash flow$ 91100400002190040000b. How much would cash flow be if there were only $13,000 in depreciation? All other factors are the same.Cash flow$ 83000c. How much cash flow is lost due to the reduced depreciation from $40,000 to $13,000?Cash flow lost$ 8100View Hint #1Worksheet2.Difficulty: BasicLearning Objective: 12-02 Cash flow ratherthan earnings is used in the capitalbudgeting decision.award:1.00 pointThe Short-Line Railroad is considering a $120,000 investment in either of two companies. The cash flowsare as follows:Year1234 10Electric Co. Water Works$ 60,000$ 30,00030,00030,00030,00060,00020,00020,000http://ezto.mheducation.com/hm.tpxPage 1 of 18Assignment Print View11/24/14, 1:15 AMa. Compute the payback period for both companies. (Round your answers to 1 decimal place.)Electric Co.Water WorksPayback Periodyearsyearsb. Which of the investments is superior from the information provided?Water WorksElectric Co.rev: 04_16_2014_QC_48106, 08_08_2014_QC_48106Worksheet3.Difficulty: BasicLearning Objective: 12-03 The paybackmethod considers the importance ofliquidity, but fails to consider the time valueof money.award:2.00 pointsX-treme Vitamin Company is considering two investments, both of which cost $18,000. The cash flows areas follows:Year123Project A$20,0008,0007,000Project B$15,0007,00012,000Use Appendix B for an approximate answer but calculate your final answer using the formula and financialcalculator methods.a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimalplaces.)Project AProject BPayback Periodyear(s)year(s)a-2. Which of the two projects should be chosen based on the payback method?Project AProject Bb-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Donot round intermediate calculations and round your final answers to 2 decimal places.)Project AProject BNet Present Value$$b-2. Which of the two projects should be chosen based on the net present value method?Project AProject Bhttp://ezto.mheducation.com/hm.tpxPage 2 of 18Assignment Print Viewc.11/24/14, 1:15 AMShould a firm normally have more confidence in the payback method or the net present valuemethod?Net present value methodPayback methodView Hint #1WorksheetDifficulty: Basic4.Learning Objective: 12-03 The paybackmethod considers the importance ofliquidity, but fails to consider the time valueof money.Learning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:1.00 pointYou buy a new piece of equipment for $22,816, and you receive a cash inflow of $3,100 per year for 10years. Use Appendix D for an approximate answer but calculate your final answer using the financialcalculator method.What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as apercent rounded to 2 decimal places.)Internal rate of return%View Hint #1Worksheet5.Difficulty: BasicLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:1.00 pointHome Security Systems is analyzing the purchase of manufacturing equipment that will cost $32,000. Theannual cash inflows for the next three years will be:Year123Cash Flow$ 16,00014,0009,000Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financialcalculator method.a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answeras a percent rounded to 2 decimal places.)Internal rate of returnhttp://ezto.mheducation.com/hm.tpx%Page 3 of 18Assignment Print View11/24/14, 1:15 AMb. With a cost of capital of 10 percent, should the equipment be purchased?YesNoWorksheet6.Difficulty: BasicLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:2.00 pointsThe Pan American Bottling Co. is considering the purchase of a new machine that would increase thespeed of bottling and save money. The net cost of this machine is $66,000. The annual cash flows have thefollowing projections. Use Appendix B and Appendix D for an approximate answer but calculate your finalanswer using the formula and financial calculator methods.Year Cash Flow1$ 31,000236,00034533,00026,00012,000a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine? (Do notround intermediate calculations and round your final answer to 2 decimal places.)Net present value$b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as apercent rounded to 2 decimal places.)Internal rate of return%c. Should the project be accepted?YesNorev: 04_08_2014_48104View Hint #1Worksheet7.Difficulty: IntermediateLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:1.00 pointTurner Video will invest $62,500 in a project. The firms cost of capital is 6 percent. The investment willprovide the following inflows. Use Appendix A for an approximate answer but calculate your final answerhttp://ezto.mheducation.com/hm.tpxPage 4 of 18Assignment Print View11/24/14, 1:15 AMusing the formula and financial calculator methods.Year12345Inflow$ 17,00019,00023,00027,00031,000The internal rate of return is 11 percent.a. If the reinvestment assumption of the net present value method is used, what will be the total value ofthe inflows after five years? (Assume the inflows come at the end of each year.) (Do not roundintermediate calculations and round your answer to 2 decimal places.)Total value of inflows$b. If the reinvestment assumption of the internal rate of return method is used, what will be the total valueof the inflows after five years? (Use the given internal rate of return. Do not round intermediatecalculations and round your answer to 2 decimal places.)Total value of inflows$c. Which investment assumption is better?Reinvestment assumption of IRRReinvestment assumption of NPVView Hint #1Worksheet8.Difficulty: IntermediateLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:2.00 pointsKeller Construction is considering two new investments. Project E calls for the purchase of earthmovingequipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present valueprofile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B foran approximate answer but calculate your final answer using the formula and financial calculator methods.Project E($46,000 investment)Year Cash Flow1$ 9,000213,000323,000430,000Project H($45,000 investment)YearCash Flow1$ 24,000218,000314,000a. Determine the net present value of the projects based on a zero percent discount rate.Project EProject Hhttp://ezto.mheducation.com/hm.tpxNet Present Value$$Page 5 of 18Assignment Print View11/24/14, 1:15 AMb. Determine the net present value of the projects based on a discount rate of 12 percent. (Do not roundintermediate calculations and round your answers to 2 decimal places.)Net Present ValueProject EProject H$$c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 12percent?Project EProject HBoth H and EWorksheet9.Learning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.Difficulty: Challengeaward:4.00 pointsTelstar Communications is going to purchase an asset for $680,000 that will produce $330,000 per year forthe next four years in earnings before depreciation and taxes. The asset will be depreciated using the threeyear MACRS depreciation schedule in Table 1212. (This represents four years of depreciation based on thehalf-year convention.) The firm is in a 30 percent tax bracket.Fill in the schedule below for the next four years. (Input all amounts as positive values. Round youranswers to the nearest whole dollar amount.)Year 1Year 2Year 3Year 4Earnings before depreciation and taxesDepreciation$$$$Earnings before taxesTaxes$$$$Earnings after taxesDepreciation$$$$Cash flow$$$$View Hint #1Worksheet10.Difficulty: ChallengeLearning Objective: 12-02 Cash flow ratherthan earnings is used in the capitalbudgeting decision.award:2.00 pointshttp://ezto.mheducation.com/hm.tpxPage 6 of 18Assignment Print View11/24/14, 1:15 AMThe Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRSdepreciation. The cost is $120,000 and the asset will provide the following stream of earnings beforedepreciation and taxes for the next four years: Use Table 12-12.Year 1Year 2Year 3Year 4$ 52,00060,00036,00027,000The firm is in a 30 percent tax bracket and has a cost of capital of 8 percent. Use Appendix B for anapproximate answer but calculate your final answer using the formula and financial calculator methods.a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do notround intermediate calculations and round your answer to 2 decimal places.)Net present value$b. Under the net present value method, should Summitt Petroleum Corporation purchase the asset?YesNoView Hint #1Worksheet11.Difficulty: ChallengeLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:2.00 pointsAn asset was purchased three years ago for $165,000. It falls into the five-year category for MACRSdepreciation. The firm is in a 35 percent tax bracket. Use Table 1212.a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $19,560. (Inputall amounts as positive values. Do not round intermediate calculations and round your answersto whole dollars.)Tax loss on the saleTax benefit$$b. Compute the gain and related tax on the sale if the asset is sold now for $65,060. (Input all amounts aspositive values. Do not round intermediate calculations and round your answers to wholedollars.)Taxable gain$Tax obligation$View Hint #1http://ezto.mheducation.com/hm.tpxPage 7 of 18Assignment Print View11/24/14, 1:15 AMWorksheet12.Learning Objective: 12-02 Cash flow ratherthan earnings is used in the capitalbudgeting decision.Difficulty: Challengeaward:3.00 pointsDataPoint Engineering is considering the purchase of a new piece of equipment for $210,000. It has aneight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of$110,000 in nondepreciable working capital. Twenty-seven thousand dollars of this investment will berecovered after the sixth year and will provide additional cash flow for that year. Income before depreciationand taxes for the next six are shown in the following table. Use Table 1211, Table 1212. Use Appendix B for anapproximate answer but calculate your final answer using the formula and financial calculator methods.Year123456Amount$ 176,000154,000124,000109,00092,00082,000The tax rate is 40 percent. The cost of capital must be computed based on the following:DebtPreferred stockCommon equity(retained earnings)KdKpCost(aftertax)6.40%10.40Weights35%15Ke13.0050a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round yourdepreciation base and annual depreciation answers to the nearest whole dollar. Round yourpercentage depreciation answers to 3 decimal places.)Year123456DepreciationBase$PercentageDepreciationAnnualDepreciation$$b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year6. (Do not round intermediate calculations and round your answers to 2 decimal places.)Year12http://ezto.mheducation.com/hm.tpxCash Flow$Page 8 of 18Assignment Print View11/24/14, 1:15 AM3456c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enteryour answer as a percent rounded to 2 decimal places.)Weighted average cost of capital%d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as apercent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations.Round your answer to 2 decimal places.)Net present value$d-2. Should DataPoint purchase the new equipment?YesNoView Hint #1Worksheet13.Difficulty: ChallengeLearning Objective: 12-05 The discount orcutoff rate is normally the cost of capital.award:5.00 pointsHercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $82,000.The equipment falls into the five-year category for MACRS depreciation and can currently be sold for$36,800.A new piece of equipment will cost $250,000. It also falls into the five-year category for MACRSdepreciation.Assume the new equipment would provide the following stream of added cost savings for the next sixyears. Use Table 1212. Use Appendix B for an approximate answer but calculate your final answer using theformula and financial calculator methods.Year123456Cash Savings$63,00053,00051,00049,00046,00035,000The firms tax rate is 35 percent and the cost of capital is 8 percent.a. What is the book value of the old equipment? (Do not round intermediate calculations and roundyour answer to the nearest whole dollar.)Book valuehttp://ezto.mheducation.com/hm.tpx$Page 9 of 18Assignment Print View11/24/14, 1:15 AMb. What is the tax loss on the sale of the old equipment? (Do not round intermediate calculations andround your answer to the nearest whole dollar.)Tax loss$c. What is the tax benefit from the sale? (Do not round intermediate calculations and round youranswer to the nearest whole dollar.)Tax benefit$d. What is the cash inflow from the sale of the old equipment? (Do not round intermediatecalculations and round your answer to the nearest whole dollar.)Cash inflow$e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.)(Do not round intermediate calculations and round your answer to the nearest whole dollar.)Net cost$f. Determine the depreciation schedule for the new equipment. (Round the depreciation base andannual depreciation answers to the nearest whole dollar. Round the percentage depreciationfactors to 3 decimal places.)DepreciationBase$Year123456PercentageDepreciationAnnualDepreciation$$g. Determine the depreciation schedule for the remaining years of the old equipment. (Round thedepreciation base and annual depreciation answers to the nearest whole dollar. Round thepercentage depreciation factors to 3 decimal places.)Year1234DepreciationBase$PercentageDepreciationAnnualDepreciation$h. Determine the incremental depreciation between the old and new equipment and the related tax shieldbenefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answershttp://ezto.mheducation.com/hm.tpxPage 10 of 18Assignment Print View11/24/14, 1:15 AMto the nearest whole dollar.)Depreciationon NewEquipmentYear123456$Depreciationon OldEquipment$IncrementalDepreciation$Tax RateTax ShieldBenefits$i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal roundedto 2 decimal places. Round all other answers to the nearest whole dollar.)Year123456Savings$63,00053,00051,00049,00046,00035,000AftertaxSavings(1 Tax Rate)$j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annualbenefits. (Do not round intermediate calculations and round your answers to the nearest wholedollar.)Year123456Tax ShieldBenefits fromDepreciationAftertaxCost Savings$Total AnnualBenefits$j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculationsand round your answer to the nearest whole dollar.)Total annual benefits$k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e).(Do not round intermediate calculations. Negative amount should be indicated by a minus sign.Round your answer to the nearest whole dollar.)Net present value$k-2. Should the replacement be undertaken?http://ezto.mheducation.com/hm.tpxPage 11 of 18Assignment Print View11/24/14, 1:15 AMNoYesView Hint #1Worksheet14.Difficulty: ChallengeLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.award:2.00 pointsAssume you are risk-averse and have the following three choices.ABExpectedValue$2,4402,560StandardDeviation$1,4201,960C2,020910a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.)ProjectsABCCoefficient ofVariationb. Which project will you select?Project AProject BProject CView Hint #1Worksheet15.Difficulty: BasicLearning Objective: 13-02 Most investorsare risk-averse, which means they dislikeuncertainty.award:2.00 pointsMyers Business Systems is evaluating the introduction of a new product. The possible levels of unit salesand the probabilities of their occurrence are given next:PossibleMarket ReactionLow responseModerate responseHigh responseVery high responseSales inUnits20354560Probabilities.30.20.20.30a. What is the expected value of unit sales for the new product? (Do not round intermediate calculationsand round your answer to the nearest whole unit.)http://ezto.mheducation.com/hm.tpxPage 12 of 18Assignment Print View11/24/14, 1:15 AMunitsExpected valueb. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)Standard deviationunitsView Hint #1Worksheet16.Difficulty: BasicLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.award:3.00 pointsShack Homebuilders Limited is evaluating a new promotional campaign that could increase home sales.Possible outcomes and probabilities of the outcomes are shown next.Possible OutcomesIneffective campaignNormal responseExtremely effectiveAdditionalSales in Units Probabilities50.4070.30130.30Compute the coefficient of variation. (Do not round intermediate calculations. Round your answer to 3decimal places.)Coefficient of variationView Hint #1Worksheet17.Difficulty: BasicLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.award:2.00 pointsFive investment alternatives have the following returns and standard deviations of returns.Returns:Alternatives Expected ValueA$ 1,750B1,380C7,600D1,730E62,400StandardDeviation$ 6009303,00056023,100Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk byusing the coefficient of variation. (Round your answers to 3 decimal places.)http://ezto.mheducation.com/hm.tpxPage 13 of 18Assignment Print View11/24/14, 1:15 AMAlternativesCoefficient ofVariationRankA(Click to select)B(Click to select)C(Click to select)D(Click to select)E(Click to select)Worksheet18.Difficulty: BasicLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.award:2.00 pointsTim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.InvestmentsBuy stocksBuy bondsBuy commodity futuresBuy optionsReturns:Expected Value$ 9,0107,03026,80021,200StandardDeviation$ 6,4702,46023,90021,500a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)Coefficient ofVariationBuy stocksBuy bondsBuy commodity futuresBuy optionsa-2. Which one of the following four investments should Tim choose?Buy bondsBuy stocksBuy commodity futuresBuy optionsb. Which one of the four investments should Mike choose?Buy bondsBuy stocksBuy optionsBuy commodity futuresView Hint #1http://ezto.mheducation.com/hm.tpxPage 14 of 18Assignment Print View11/24/14, 1:15 AMWorksheet19.Difficulty: BasicLearning Objective: 13-02 Most investorsare risk-averse, which means they dislikeuncertainty.award:2.00 pointsMountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. LakewayTrain Co. is more typical of the average corporation and is risk-averse.ProjectsABCDReturns:Expected Value$298,000704,000164,000196,000StandardDeviation$210,000454,000133,000252,000a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)Coefficient ofVariationProject AProject BProject CProject Da-2. Which projects should Mountain Ski Corp. choose?Project AProject BProject DProject Cb. Which one of the four projects should Lakeway Train Co. choose based on the same criteria of usingthe coefficient of variation?Project CProject BProject DProject AView Hint #1Worksheet20.Difficulty: BasicLearning Objective: 13-02 Most investorsare risk-averse, which means they dislikeuncertainty.award:2.00 pointsWaste Industries is evaluating a $55,500 project with the following cash flows.Years Cash Flows1$ 9,120220,200326,600416,300526,300http://ezto.mheducation.com/hm.tpxPage 15 of 18Assignment Print View11/24/14, 1:15 AMThe coefficient of variation for the project is.475.Coefficient ofVariation0.25.26.50.51.75.76 1.001.01 1.25Discount Rate7%9%13%16%19%Use Appendix B for an approximate answer but calculate your final answer using the formula and financialcalculator methods.a. Select the appropriate discount rate.7%19%13%9%16%b. Compute the net present value. (Negative amount should be indicated by a minus sign. Do notround intermediate calculations and round your answer to 2 decimal places.)Net present value$c. Based on the net present value should the project be undertaken?NoYesView Hint #1Worksheet21.Difficulty: IntermediateLearning Objective: 13-03 Becauseinvestors dislike uncertainty, they willrequire higher rates of return from riskyprojects.award:2.00 pointsDixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposesover the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 11percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will callfor a higher discount rate of 16 percent. Either method will require an initial capital outlay of $102,000. Theinflows from projected business over the next five years are given next.Years12345Method 1$32,10038,50047,80035,10020,600http://ezto.mheducation.com/hm.tpxMethod 2$17,60025,50040,40037,00072,200Page 16 of 18Assignment Print View11/24/14, 1:15 AMUse Appendix B for an approximate answer but calculate your final answers using the formula and financialcalculator methods.a. Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations andround your answers to 2 decimal places.)Net Present Value$$Method 1Method 2b. Which method should be selected using net present value analysis?Method 1Method 2Neither of theseView Hint #1Worksheet22.Difficulty: IntermediateLearning Objective: 13-03 Becauseinvestors dislike uncertainty, they willrequire higher rates of return from riskyprojects.award:2.00 pointsDebbys Dance Studios is considering the purchase of new sound equipment that will enhance thepopularity of its aerobics dancing. The equipment will cost $26,300. Debby is not sure how many membersthe new equipment will attract, but she estimates that her increased annual cash flows for each of the nextfive years will have the following probability distribution. Debbys cost of capital is 12 percent. Use AppendixD for an approximate answer but calculate your final answers using the formula and financial calculatormethods.Cash Flow$ 3,8905,1907,5509,800Probability.2.3.4.1a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.Expected Cash Flow$b. What is the expected net present value? (Negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answer to 2 decimal places.)Net Present Value$c. Should Debby buy the new equipment?YesNoView Hint #1Learning Objective: 13-01 The concept ofhttp://ezto.mheducation.com/hm.tpxPage 17 of 18Assignment Print View11/24/14, 1:15 AMWorksheet23.Difficulty: Intermediaterisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.award:2.00 pointsHighland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment willbe made. The Australian gold mine will cost $1,645,000 and will produce $309,000 per year in years 5through 15 and $515,000 per year in years 16 through 25. The U.S. gold mine will cost $2,054,000 and willproduce $252,000 per year for the next 25 years. The cost of capital is 9 percent. Use Appendix D for anapproximate answer but calculate your final answers using the formula and financial calculator methods.(Note: In looking up present value factors for this problem, you need to work with the concept of a deferredannuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years, the returns inyears 16 through 25 represent 10 years.)a-1. Calculate the net present value for each project. (Do not round intermediate calculations andround your answers to 2 decimal places.)The Australian mineThe U.S. mineNet Present Value$$a-2. Which investment should be made?Australian mineU.S. mineb-1. Assume the Australian mine justifies an extra 1 percent premium over the normal cost of capitalbecause of its riskiness and relative uncertainty of cash flows. Calculate the new net present valuegiven this assumption. (Negative amount should be indicated by a minus sign. Do not roundintermediate calculations and round your answer to 2 decimal places.)The Australian mineNet Present Value$b-2. Does the new assumption change the investment decision?NoYesView Hint #1Worksheethttp://ezto.mheducation.com/hm.tpxDifficulty: ChallengeLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.

 

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