1 You are quoted an interest rate of 8 on an investment of $20 million What is the value of your investment after five years if interest is compounded a Annually b Monthly 2 A factory costs $10,000,000 It will produce an inflow after operating costs of $1,050,000 in year 1, $2,000,000 in year 2, $3,500,000 in year 3, $4,500,000 in year 4 The opportunity cost of capital is 10 Calculate the NPV 3 A 10 year U S Treasury bond with a face value of $1,000 pays a coupon of 4 75 (2 375 of face value every six months) The reported yield to maturity is 3 75 (a six month discount rate of 3 75 2 1 875 ) Please take note for this problem that coupons on U S Treasury bonds are paid semiannually What is the present value of the bond 4 Babe Ruth Enterprises (BRE) is expected to have the following dividend payments Year 1 $20 Year 2 $22 Year 3 $23 50 The market capitalization rate for this company is 11 Staring in Year 4, the company is expected to provide a level dividend stream of $24 each year What is the current stock price 5 Randall Cobbs Investment Firm is providing advice to a wealthy client on the following questions a What is the payback period on each of the following projects Cash Flows ($) Project C 0 C 1 C 2 C 3 C 4 A 9,000 2,000 2,000 2,000 3,000 B 2,000 1,000 1,000 2,500 3,500 C 12,000 2000 5000 5000 5000 b Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept c If you use a cutoff period of three years, which projects would you accept d If the opportunity cost of capital is 9 , which projects have positive NPVs 6 Hank Aaron Enterprises (HAE) is trying to decide whether or not to invest in the following project (using the IRR rule) a What is the IRR of the project (using excel) Cash Flows C 0 C 1 C 2 8,500 4,500 6,000 b Should HAE proceed with the project if the opportunity cost of capital is 10 (using the IRR rule) c Should HAE proceed with the project if the opportunity cost of capital is 20 (using the IRR rule) 7 Vince Lombardis manufacturing plant has the following investment opportunities, but only $1,000,000 available for investment Which projects should he take (please show the profitability index calculations for your answer) Project NPV Investment A 500,000 600,000 B 120,000 600,000 C 100,000 1,000,000 D 150,000 200,000 E 175,000 200,000 F 20,000 200,000 8 Sullivans Mutual Fund produced the following percentage rates of return over the past 30 years 45 4 10 9 2 3 24 5 45 3 29 5 14 8 14 8 11 2 8 6 29 2 15 4 42 3 24 5 21 3 18 1 23 4 15 2 27 6 12 3 31 2 35 1 40 9 5 5 20 3 27 6 29 2 38 4 19 3 22 2 Calculate (using excel) the average return, standard deviation, variance, and range of Sullivans Mutual Fund 9 The year is 2050 and the CEO of Sullivan Investments is looking back on previous returns by year Here are inflation rates and U S stock market and Treasury bill returns between 2045 and 2049 Year Inflation Stock Market Return T Bill Return 2045 2 0 20 4 2 3 2046 2 5 22 2 3 2 2047 3 7 25 7 3 4 2048 4 5 27 5 1 7 2049 2 2 15 5 0 4 What was the risk premium in each year What was the average risk premium 10 In addition to having recruiting stations in most major cities in the U S , the Navy also recruits military enlistments through (a) mobile teams ( Road Shows ) which visit various high schools, colleges, and special events throughout the year, (b) television commercials, and (c) newspaper advertisements Mobile teams, TV commercials, and newspaper ads cost $100,000 each, $75,000 per series 1 , and $50,000 per block 1 , respectively Last year, the Navy spent $1,125,000 for 5 Mobile Teams $500,000 5 Series of TV Commercials $375,000 5 Blocks of Newspaper Ads $250,000 The budget for the coming year has been reduced dramatically to only $500,000 What mix of recruiting and advertising methods would you recommend for next year How would you allocate the $1,000,000 budget among the different recruiting and advertising methods To assist you, a major study has been completed (using historical data) to measure the effectiveness of each method The results of the study (below) indicate the estimated total (cumulative) recruit enlistments per 100,000 population for each of the three methods For example, with 5 blocks of newspaper ads, the estimated total number of recruits will be 137 per 100,000 population Cumulative Enlistments per 100,000 Population Number of Each Recruiting Method Recruiting Advertising Method 1 2 3 4 5 Mobile Teams 150 280 400 450 475 TV Commercials (series) 140 270 300 320 330 Newspaper Ads (blocks) 100 120 130 135 137 1 A series of television commercials or a block of newspaper ads appear on various TV stations and in various newspapers over some specified period of time

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1. You are quoted an interest rate of 8% on an investment of $20 million. What is the value of your investment after five years

1. You are quoted an interest rate of 8% on an investment of $20 million. What is the value of your investment after five years if interest is compounded:

a. Annually?

b. Monthly?

2. A factory costs $10,000,000. It will produce an inflow after operating costs of $1,050,000 in year 1, $2,000,000 in year 2, $3,500,000 in year 3, $4,500,000 in year 4. The opportunity cost of capital is 10%. Calculate the NPV.

3. A 10-year U.S. Treasury bond with a face value of $1,000 pays a coupon of 4.75% (2.375% of face value every six months). The reported yield to maturity is 3.75% (a six-month discount rate of 3.75/2 = 1.875%). Please take note for this problem that coupons on U.S. Treasury bonds are paid semiannually. What is the present value of the bond?

4. Babe Ruth Enterprises (BRE) is expected to have the following dividend payments: Year 1: $20 Year 2: $22 Year 3: $23.50 The market capitalization rate for this company is 11%. Staring in Year 4, the company is expected to provide a level dividend stream of $24 each year. What is the current stock price?

5. Randall Cobbs Investment Firm is providing advice to a wealthy client on the following questions:

a. What is the payback period on each of the following projects?

Cash Flows ($)

Project	C₀	C₁	C₂	C₃	C₄
A	-9,000	2,000	2,000	2,000	3,000
B	-2,000	1,000	1,000	2,500	3,500
C	-12,000	2000	5000	5000	5000

b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?

c. If you use a cutoff period of three years, which projects would you accept?

d. If the opportunity cost of capital is 9%, which projects have positive NPVs?

6. Hank Aaron Enterprises (HAE) is trying to decide whether or not to invest in the following project (using the IRR rule):

a. What is the IRR of the project (using excel)? Cash Flows

C₀	C₁	C₂
-8,500	+4,500	+6,000

b. Should HAE proceed with the project if the opportunity cost of capital is 10% (using the IRR rule)?

c. Should HAE proceed with the project if the opportunity cost of capital is 20% (using the IRR rule)?

7. Vince Lombardis manufacturing plant has the following investment opportunities, but only $1,000,000 available for investment. Which projects should he take (please show the profitability index calculations for your answer)?

Project	NPV	Investment
A	500,000	600,000
B	120,000	600,000
C	100,000	1,000,000
D	150,000	200,000
E	175,000	200,000
F	20,000	200,000

8. Sullivans Mutual Fund produced the following percentage rates of return over the past 30 years:

45.4	10.9	-2.3	24.5	45.3	29.5	-14.8	14.8	11.2	8.6
29.2	-15.4	42.3	24.5	21.3	18.1	-23.4	15.2	27.6	12.3
31.2	35.1	40.9	5.5	-20.3	27.6	29.2	38.4	19.3	22.2

Calculate (using excel) the average return, standard deviation, variance, and range of Sullivans Mutual Fund.

9. The year is 2050 and the CEO of Sullivan Investments is looking back on previous returns by year. Here are inflation rates and U.S. stock market and Treasury bill returns between 2045 and 2049:

Year	Inflation	Stock Market Return	T-Bill Return
2045	2.0	20.4	2.3
2046	2.5	22.2	3.2
2047	3.7	25.7	3.4
2048	4.5	27.5	1.7
2049	2.2	15.5	0.4

What was the risk premium in each year?

What was the average risk premium?

10. In addition to having recruiting stations in most major cities in the U.S., the Navy also recruits military enlistments through (a) mobile teams ("Road Shows") which visit various high schools, colleges, and special events throughout the year, (b) television commercials, and (c) newspaper advertisements. Mobile teams, TV commercials, and newspaper ads cost $100,000 each, $75,000 per series^{^[1]}, and $50,000 per block¹, respectively.

Last year, the Navy spent $1,125,000 for:

5 Mobile Teams $500,000

5 Series of TV Commercials $375,000

5 Blocks of Newspaper Ads $250,000

The budget for the coming year has been reduced dramatically to only $500,000. What mix of recruiting and advertising methods would you recommend for next year? How would you allocate the $1,000,000 budget among the different recruiting and advertising methods?

To assist you, a major study has been completed (using historical data) to measure the effectiveness of each method. The results of the study (below) indicate the estimated total (cumulative) recruit enlistments per 100,000 population for each of the three methods. For example, with 5 blocks of newspaper ads, the estimated total number of recruits will be 137 per 100,000 population.

Cumulative Enlistments per 100,000 Population

Number of Each Recruiting Method

Recruiting/Advertising Method	1	2	3	4	5
Mobile Teams	150	280	400	450	475
TV Commercials (series)	140	270	300	320	330
Newspaper Ads (blocks)	100	120	130	135	137

Recruiting/Advertising Method

Mobile Teams

150

280

400

450

475

TV Commercials (series)

140

270

300

320

330

Newspaper Ads (blocks)

100

120

130

135

137

^{^[1]}A series of television commercials or a block of newspaper ads appear on various TV stations and in various newspapers over some specified period of time.