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##### BUSI 320 Corporate Finance Quiz 2014 Solution

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Question;The change in real GDP resulting from an initial change in spending can be calculated by:A. Dividing the multiplier by the initial change in spending B. Dividing the initial change in spending by the multiplier C. Multiplying the multiplier by the initial change in spending D. Adding the initial change in spending to the multiplierThe simple multiplier formula assumes the following, except:A. The economy has excess capacity and room to expand output B. Firms will raise prices as buyers buy more of their output C. People will spend more if they earn additional income D. Business firms will increase production if demand for their output increasesIn 2008, the Federal government provided tax rebate checks to taxpayers in the hope that:A. C would shift down B. C would shift up C. G would shift down D. G would shift upWhen the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.A. TrueB. FalseThe multiplier measures the change in real GDP that results from a given change in the price level.A. TrueB. FalseWhen the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.A. TrueB. FalseIn the Great Recession of 2007-2009, the sector of the economy that decreased the most was G.A. TrueB. FalseAn economy characterized by high unemployment is likely to be:A. Experiencing a high rate of economic growth B. Experiencing hyperinflation C. In a recessionary expenditure gap D. In an inflationary expenditure gapA commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively:A. $30,000 and $150,000 B. $50,000 and $250,000C. $50,000 and $500,000D. $100,000 and $500,000Lowering the reserve ratio:A. increases the discount rate. B. decreases the discount rate. C. changes required reserves to excess reserves.D. decreases the amount of excess reserves banks must keep.The economy is experiencing a low rate of economic growth and the Fed decides to pursue an expansionary money policy. Which set of actions by the Fed would be most consistent with this policy?A. Selling government securities and lowering the discount rate B. Selling government securities and raising the discount rate C. Buying government securities and raising the discount rate D. Buying government securities and lowering the discount rateInflationary pressure is a growing problem for the economy. Therefore, the Federal Reserve decides to pursue a policy to reduce the inflationary pressure. Which policy changes by the Fed would reinforce each other to achieve that objective?A. Selling government securities and raising the discount rateB. Selling government securities and lowering the discount rate C. Buying government securities and lowering the discount rate D. Buying government securities and lowering the reserve ratioThe Federal Reserve Banks are owned by the:A. federal government. B. Board of Governors. C. U.S. Treasury. Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 1 of 181. award:1.00 point2. award:1.00 pointAssume a corporation has earnings before depreciation and taxes of $102,000, depreciation of $40,000,and that it has a 35 percent tax bracket.a. Compute its cash flow using the following format. (Input all answers as positive values.)Earnings before depreciation and taxes $DepreciationEarnings before taxes $TaxesEarnings after taxes $DepreciationCash flow $b. How much would cash flow be if there were only $12,000 in depreciation? All other factors are the same.Cash flow $c. How much cash flow is lost due to the reduced depreciation from $40,000 to $12,000?Cash flow lost $View Hint #1Worksheet Difficulty: BasicLearning Objective: 12-02 Cash flow ratherthan earnings is used in the capitalbudgeting decision.The Short-Line Railroad is considering a $120,000 investment in either of two companies. The cash flowsare as follows:Year Electric Co. Water Works1 $ 60,000 $ 30,0002 30,000 30,0003 30,000 60,0004 ? 10 20,000 20,000Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 2 of 183. award:2.00 pointsa. Compute the payback period for both companies. (Round your answers to 1 decimal place.)Payback PeriodElectric Co. yearsWater Works yearsb. Which of the investments is superior from the information provided?Water WorksElectric Co.rev: 04_16_2014_QC_48106Worksheet Difficulty: BasicLearning Objective: 12-03 The paybackmethod considers the importance ofliquidity, but fails to consider the time valueof money.X-treme Vitamin Company is considering two investments, both of which cost $44,000. The cash flows areas follows:Year Project A Project B1 $46,000 $38,0002 17,000 18,0003 13,000 15,000Use 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.)Payback PeriodProject A year(s)Project B 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.)Net Present ValueProject A $Project B $b-2. Which of the two projects should be chosen based on the net present value method?Project AProject BAssignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 3 of 184. award:1.00 point5. award:1.00 pointc. Should a firm normally have more confidence in the payback method or the net present valuemethod?Net present value methodPayback methodView Hint #1WorksheetLearning Objective: 12-03 The paybackmethod considers the importance ofliquidity, but fails to consider the time valueof money.Difficulty: BasicLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.You buy a new piece of equipment for $30,204, and you receive a cash inflow of $4,100 per year for 14years. 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 #1Worksheet Difficulty: BasicLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $95,000. Theannual cash inflows for the next three years will be:Year Cash Flow1 $ 48,0002 46,0003 41,000Use 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 return %Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 4 of 186. award:2.00 points7. award:1.00 pointb. With a cost of capital of 15 percent, should the equipment be purchased?YesNoWorksheet Difficulty: BasicLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.The 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 $69,000. 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 $ 29,0002 29,0003 29,0004 34,0005 20,000a. 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 #1Worksheet Difficulty: IntermediateLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.Turner Video will invest $84,500 in a project. The firm?s cost of capital is 6 percent. The investment willprovide the following inflows. Use Appendix A for an approximate answer but calculate your final answerAssignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 5 of 188. award:2.00 pointsusing the formula and financial calculator methods.Year Inflow1 $ 28,0002 30,0003 34,0004 38,0005 42,000The internal rate of return is 12 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 #1Worksheet Difficulty: IntermediateLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.Keller 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 Project H($52,000 investment) ($47,000 investment)Year Cash Flow Year Cash Flow1 $ 10,000 1 $ 27,0002 14,000 2 19,0003 24,000 3 15,0004 31,000a. Determine the net present value of the projects based on a zero percent discount rate.Net Present ValueProject E $Project H $Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 6 of 189. award:4.00 points10. award:2.00 pointsb. Determine the net present value of the projects based on a discount rate of 9 percent. (Do not roundintermediate calculations and round your answers to 2 decimal places.)Net Present ValueProject E $Project H $c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9percent?Project EProject HBoth H and EWorksheet Difficulty: ChallengeLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.Telstar Communications is going to purchase an asset for $620,000 that will produce $300,000 per year forthe next four years in earnings before depreciation and taxes. The asset will be depreciated using the threeyearMACRS depreciation schedule in Table 12?12. (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 1 Year 2 Year 3 Year 4Earnings before depreciation and taxes $ $ $ $DepreciationEarnings before taxes $ $ $ $TaxesEarnings after taxes $ $ $ $DepreciationCash flow $ $ $ $View Hint #1Worksheet Difficulty: ChallengeLearning Objective: 12-02 Cash flow ratherthan earnings is used in the capitalbudgeting decision.The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRSAssignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 7 of 1811. award:2.00 pointsdepreciation. The cost is $160,000 and the asset will provide the following stream of earnings beforedepreciation and taxes for the next four years: Use Table 12-12.Year 1 $ 90,000Year 2 101,000Year 3 46,000Year 4 44,000The firm is in a 30 percent tax bracket and has a cost of capital of 16 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 #1Worksheet Difficulty: ChallengeLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.An asset was purchased three years ago for $200,000. It falls into the five-year category for MACRSdepreciation. The firm is in a 40 percent tax bracket. Use Table 12?12.a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $23,060. (Inputall amounts as positive values. Do not round intermediate calculations and round your answersto whole dollars.)Tax loss on the sale $Tax benefit $b. Compute the gain and related tax on the sale if the asset is sold now for $72,060. (Input all amounts aspositive values. Do not round intermediate calculations and round your answers to wholedollars.)Taxable gain $Tax obligation $View Hint #1Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 8 of 1812. award:3.00 pointsWorksheet Difficulty: ChallengeLearning Objective: 12-02 Cash flow ratherthan earnings is used in the capitalbudgeting decision.DataPoint Engineering is considering the purchase of a new piece of equipment for $400,000. It has aneight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of$220,000 in nondepreciable working capital. Seventy-five 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 12?11, Table 12?12. Use Appendix B for anapproximate answer but calculate your final answer using the formula and financial calculator methods.Year Amount1 $ 233,0002 192,0003 162,0004 147,0005 111,0006 101,000The tax rate is 30 percent. The cost of capital must be computed based on the following:Cost(aftertax) WeightsDebt Kd 8.20% 25%Preferred stock Kp 12.80 15Common equity(retained earnings) Ke 17.00 60a. 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.)YearDepreciationBasePercentageDepreciationAnnualDepreciation1 $ $23456$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.)Year Cash Flow1 $23Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 9 of 1813. award:5.00 points456c. 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?NoYesView Hint #1Worksheet Difficulty: Challenge Learning Objective: 12-05 The discount orcutoff rate is normally the cost of capital.Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $64,000.The equipment falls into the five-year category for MACRS depreciation and can currently be sold for$27,800.A new piece of equipment will cost $154,000. 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 12?12. Use Appendix B for an approximate answer but calculate your final answer using theformula and financial calculator methods.Year Cash Savings1 $65,0002 57,0003 55,0004 53,0005 50,0006 39,000The firm?s 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 value $Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 10 of 18b. 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.)YearDepreciationBasePercentageDepreciationAnnualDepreciation1 $ $23456$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.)YearDepreciationBasePercentageDepreciationAnnualDepreciation1 $ $234h. 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 answersAssignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 11 of 18to the nearest whole dollar.)YearDepreciationon NewEquipmentDepreciationon OldEquipmentIncrementalDepreciation Tax RateTax ShieldBenefits1 $ $ $ $23456i. 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.)Year Savings (1 ? Tax Rate)AftertaxSavings1 $65,000 $2 57,0003 55,0004 53,0005 50,0006 39,000j-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.)YearTax ShieldBenefits fromDepreciationAftertaxCost SavingsTotal AnnualBenefits1 $ $23456j-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?Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 12 of 1814. award:2.00 points15. award:2.00 pointsYesNoView Hint #1Worksheet Difficulty: ChallengeLearning Objective: 12-04 The net presentvalue and internal rate of return aregenerally the preferred methods of capitalbudgeting analysis.Assume you are risk-averse and have the following three choices.ExpectedValueStandardDeviationA $1,830 $ 970B 2,760 1,850C 1,680 1,330a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.)ProjectsCoefficient ofVariationABCb. Which project will you select?Project BProject CProject AView Hint #1Worksheet Difficulty: BasicLearning Objective: 13-02 Most investorsare risk-averse, which means they dislikeuncertainty.Myers 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 ReactionSales inUnits ProbabilitiesLow response 30.30Moderate response 45.20High response 50.30Very high response 75.20Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 13 of 1816. award:3.00 points17. award:2.00 pointsa. 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.)Expected value unitsb. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)Standard deviation unitsView Hint #1Worksheet Difficulty: BasicLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.Shack Homebuilders Limited is evaluating a new promotional campaign that could increase home sales.Possible outcomes and probabilities of the outcomes are shown next.Possible OutcomesAdditionalSales in Units ProbabilitiesIneffective campaign 50.30Normal response 110.30Extremely effective 130.40Compute the coefficient of variation. (Do not round intermediate calculations. Round your answer to 3decimal places.)Coefficient of variationView Hint #1Worksheet Difficulty: BasicLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.Five investment alternatives have the following returns and standard deviations of returns.AlternativesReturns:Expected ValueStandardDeviationA $ 1,820 $ 550B 860 1,030C 5,900 1,200D 1,980 540E 61,000 22,100Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 14 of 1818. award:2.00 pointsCalculate 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.)AlternativesCoefficient ofVariation RankA (Click to select)B (Click to select)C (Click to select)D (Click to select)E (Click to select)Worksheet Difficulty: BasicLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.InvestmentsReturns:Expected ValueStandardDeviationBuy stocks $ 8,880 $ 6,030Buy bonds 7,720 2,050Buy commodity futures 17,200 23,200Buy options 18,700 12,900a-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 commodity futuresBuy optionsView Hint #1Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 15 of 1819. award:2.00 points20. award:2.00 pointsWorksheet Difficulty: BasicLearning Objective: 13-02 Most investorsare risk-averse, which means they dislikeuncertainty.Mountain 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.ProjectsReturns:Expected ValueStandardDeviationA $269,000 $143,000B 734,000 462,000C 153,000 120,000D 163,000 298,000a-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 BProject AProject CProject DView Hint #1Worksheet Difficulty: BasicLearning Objective: 13-02 Most investorsare risk-averse, which means they dislikeuncertainty.Waste Industries is evaluating a $53,800 project with the following cash flows.Years Cash Flows1 $ 9,2402 15,9003 22,6004 21,3005 33,000Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 16 of 1821. award:2.00 pointsThe coefficient of variation for the project is.975.Coefficient ofVariation Discount Rate0?.25 4%.26?.50 9%.51?.75 10%.76? 1.00 12%1.01? 1.25 18%Use Appendix B for an approximate answer but calculate your final answer using the formula and financialcalculator methods.a. Select the appropriate discount rate.4%9%10%12%18%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 #1Worksheet Difficulty: IntermediateLearning Objective: 13-03 Becauseinvestors dislike uncertainty, they willrequire higher rates of return from riskyprojects.Dixie 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.Years Method 1 Method 21 $32,100 $17,6002 38,500 25,5003 47,800 40,4004 35,100 37,0005 20,600 72,200Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 17 of 1822. award:2.00 pointsUse 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 ValueMethod 1 $Method 2 $b. Which method should be selected using net present value analysis?Method 1Method 2Neither of theseView Hint #1Worksheet Difficulty: IntermediateLearning Objective: 13-03 Becauseinvestors dislike uncertainty, they willrequire higher rates of return from riskyprojects.Debby?s Dance Studios is considering the purchase of new sound equipment that will enhance thepopularity of its aerobics dancing. The equipment will cost $26,300. Debby is not sure how many membersthe new equipment will attract, but she estimates that her increased annual cash flows for each of the nextfive years will have the following probability distribution. Debby?s cost of capital is 12 percent. Use AppendixD for an approximate answer but calculate your final answers using the formula and financial calculatormethods.Cash Flow Probability$ 3,890.25,190.37,550.49,800.1a. 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 #1Assignment Print View 7/29/14, 10:57 PMhttp://ezto.mheducation.com/hm.tpx Page 18 of 1823. award:2.00 pointsWorksheet Difficulty: IntermediateLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment willbe made. The Australian gold mine will cost $1,694,000 and will produce $359,000 per year in years 5through 15 and $532,000 per year in years 16 through 25. The U.S. gold mine will cost $2,085,000 and willproduce $295,000 per year for the next 25 years. The cost of capital is 11 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.)Net Present ValueThe Australian mine $The U.S. mine $a-2. Which investment should be made?Australian mineU.S. mineb-1. Assume the Australian mine justifies an extra 5 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.)Net Present ValueThe Australian mine $b-2. Does the new assumption change the investment decision?YesNoView Hint #1Worksheet Difficulty: ChallengeLearning Objective: 13-01 The concept ofrisk is based on uncertainty about futureoutcomes. It requires the computation ofquantitative measures as well as qualitativeconsiderations.D. member banks.In the United States, all money is essentially the debt of government, commercial banks, and thrift institutions.A. TrueB. FalseCurrency and checkable deposits are:A. debts of the Federal Reserve Banks or of financial institutions.B. redeemable for gold and silver from the Federal Reserve System.C. of intrinsic value that determines the relative worth of money.D. the major components of the M3 definition of the money supply.

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