Question 2 (20%)

A manufacturer of motorcycles considers new production technologies in order to reduce costs. There are two alternatives. The first one saves 700 Euros/ Year, it has a capital investment cost of 1000 Euros and has an economic life of 5 years. Straight- line depreciation (on all costs) can be charged for all 5 years. This operation has a cost of capital (WACC) of 14%. The second one saves 600 Euros/year, it has a capital investment cost of 600 Euros and has an economic life of 3 years. Straight- line depreciation can be charged for all 3 years. The cost of capital (WACC) in that case is 10%. Marginal tax rates are stable at 33.333%. In order to make this investment the company plans to make a loan with 7% yearly interest for any amount of the required investment above todays Euros available costs of 300, repayable during the lifetime of the investment (equal yearly payments during the 5 or 3 years for the 1 st and 2nd alternative respectively). Which project is the best?

Question 3 A company considers paying to a government today 500 Euros in order to buy the exclusive rights to make an investment. The investment can be delayed (but it can be made only once). The revenues (received when the investment is made) are a function of the time T the company waits: rev(T)= 2000* (1 + ) . The operating cost of the investment (paid once) grows continuously with time: cost(T)= 1800*exp(0.10T). The continuous cost of capital is 10% and all the above are after taxes. Should the company go ahead and pay today 500 to purchase the rights to this investment? Remember differentiation rules.

FORMULAS (USE THOSE)

EQUIVALGUT ANUUITY VALUE - EAV (A) EAV=PVAF(K,t)NPV=NPV(1+K)w1K(1+K)w (B) EAV=NPV(N,00)K OINFINITE REPLICATIONS NPV (A) NPV(N,CQ)=KAV (B) NPV(N,)=NPV(N)(1+K)N1(1+K)N - witti rears CONJSTRAINT (A) NPV(N,n)= EAVXPVAF (K,n) (8) NPV(N,n)=NPV(N)(1+K)N[1(1+K)(MN)] (1+k)N1 - optimal investment timing with gronth Max(t)[(Rev(t)x(t))ekt] Max(t)[Rov(t)ektx(t)ektI] * K=[dRev(t)/dt]/Rev(t) when x(t)=0K=[dRev(t)/dtdx(t)/dt]/(Rov(t) *NPV =e+ReV(t)I X() - QPFIMAL INVESTMEUT TIMINL WITH GROWTH + ROTATIONS *Max(t)[NPV(t)=I+PV(t)]*N:RotATOUS:PV(t)=[Ren(t)x(t)](1ekN+)/[(1ekt)ekt]N:PV(t)=[ReN(t)x(t)]/(ekt1)*NPV(t)=I+(ReV(t)X(t))/(eKT1)K=(1eKT){d[ReV(t)x(t)]/dt}/[ReN(t)x(t)]