Question
Problem 1 - Mutually Exclusive Choices The required rate of return (discount rate) is 20%. Our firm evaluates two mutually exclusive projects A and B.
Problem 1 - Mutually Exclusive Choices The required rate of return (discount rate) is 20%. Our firm evaluates two mutually exclusive projects A and B. Their cash flows are given in the following table: Year A B 0 -3,000 -4,000 1 ?? 5,333
1. If the IRR of project A is 33.33%, what is the cash flow of the project in year 1?
2. Which project should be selected?
Problem 2 - Stay Dry After landing a job in Wall Street, you have to decide how to weather the sudden thunderstorms in New York. One solution is to buy now 20 low-quality umbrellas for $10 each from a street-vendor; they are useless after a thunderstorm, but this quantity is expected to get you through your first year. Another option is to buy a very elegant, made in France umbrella for $170 that will last you for 2 years. Finally, the famous Greek model Uranus is available; it is the most expensive one, priced at $245, but it lasts for 3 years. Having just graduated from college your credit score is not exactly stellar, so your discount rate is 30%.
1. Which umbrella model should you choose? Solve this question, without using Excel or a calculator.
Problem 3 - Lets Play A firm evaluates 4 investment projects with cash flows as provided in the table below. The required rate of return (discount rate) is 5%. Year A B C D 0 -100 -200 -40 -20 1 30 50 30 10 2 50 50 8 10 3 70 110 8 10
1. Calculate the NPV, the PP. the IRR and the PI of the 4 projects.
2. If the firm faces no budget constraints, which projects should be selected?
3. If the firm has a budget of $150, which projects should be selected?
4. If the firm has a budget constraint of 160$ and it can take any project multiple times, what is the best project combination? 5. If the four projects are mutually exclusive, which should the firm do?
Problem 4 - Bunnyland You invest in a bunny farm. Each bunny is worth 10$ to the local pet market. The required return of your investment is 24% annually. The population of bunnies in the next 6 months is: Months Bunny Population 1 month 500 2 month 1,000 3 month 1,200 4 month 1,300 5 month 1,325 6 month 1.335
1. When is the ideal time to sell all the bunnies in the farm?
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