When shopping for a new iPhone X today, you are considering buying it outright or on a 24 month plan (without data and sim plan). Buying it outright costs $999 while on a 24 month plan, the repayments are $43/month. The opportunity cost of capital can be used as a discount rate and by purchasing the phone, you give up investing in shares which earn you 6% p.a. Which is cheaper, buying the phone outright or the instalment plan? Buying outright How much do you save by choosing the cheaper option? A $888 bill for council rates has just arrived. Reading through the payment options, you can choose to pay it upfront, or over two types of instalment plans. Plan A: $222 paid quarterly in arrears for 4 quarters Plan B: $74 paid monthly in advance for 12 months A discount rate of 16% p.a. applies. Which is the cheapest option? Plan B Which is the most expensive option? Pay Upfront How much more would you pay if you picked the most expensive option compared to the cheapest option? Valuation II Annuities (calculation) You are evaluating two annuity investments using a discount rate of 10% p.a.: Annuity 1 - This annuity has 8 quarterly payments in advance, growing at 1% every 3 months. The first payment is $500. The value of this annuity today is: Annuity 2 - This annuity pays $40 every week for 2 years. The value of this annuity today is: You are asked to pay $3,000 to buy any one of the investments. Which investment will you buy (if any)? Answer: . Calculate the gain. Answer: You are evaluating two business leases in a famous shopping centre in Australia, Chadstone. A 200 square meter retail shop space, currently occupied by Louis Vuitton is up renewal today. Louis Vuitton wants to renew the lease today and is offering $1.2 mil p.a. in advance for 5 years. Chadstone property management has another bid for the space by Prada, who wishes to move to LV's space today. In return for not renewing LV's lease, Prada is willing to pay a compensation fee now of $300,000 in addition to offering a premium lease of $1 mil p.a. in arrears for 6 years. Chadstone has a WACC of 8%. Which tenant should Chadstone pick? The value of LV's proposed lease is: The value of Prada's proposed lease is: Chadstone should choose: Your task involves share analysis for Berkshire Hathaway. Today, Berkshire Hathaway is considering setting aside capital to invest in either... BHP is expected to pay a next dividend of $0.40/share Rio Tinto is expected to pay a next dividend of $0.20/share growing by 3% p.a. into perpetuity. The holding period of the shares in indefinite and the fund's WACC is 8%. The value of BHP today is: The value of Rio today is: Which has a higher value today?: In a sudden turn of events, a credit rating agency, Standard & Poors, downgrades the credit worth of Monash Tech from BB- to CCC. Time left 1:53:12 The risk of investing in Monash Tech has From Google's perspective, this would the value and price to be paid for the company. Investors would require return, holding all else equal. To reflect the greater risk, a discount rate should be used in the valuation. Before the credit downgrade, MonashTech creditors require a 8% return while it's equity holders need a 3% premium on what creditors earn. The balance sheet of Monash Tech is as follows: MonashTech Balance Sheet Assets $888 Debt $300 Equity $588 Total $888 Total $888 The required rate of return to be used in MonashTech capital budgeting is After the credit downgrade, creditors need a 1% premium on the original Kd. The new WACC of Monash Tech is Sarah Lee is considering establishing a new pancake mix which is forcasted to have revenue in the first year of $1,000,000. Revenue is projected to increase at 5% p.a., operating costs are 20% of annual revenue and the product life is 5 years. In the 4th year of operation, the pancake machines are expected to undergo maintenance which is expected to cost $850,000. The initial investment is $2mil and Sarah Lee has a cost of capital of 12% Should Sarah Lee ahead with the new product? The NPV of the new product is The IRR is which is than the required rate of return Rio Tinto is considering buying in a new rare earth mine which is forecasted to start earning $3,330,000 of revenue in the 3rd year of operation (3yrs from today). Production of rare earth is expected to increase by 20%p.a. after, having a consequent impact on revenue. Operating costs are 30% of annual revenue. The mine is kept for 4 years of production, after which the rare earth is exhausted and is expected to fetch a sale price of only $500,000. Setting up the mine requires $4mil today and $2mil in the first year. 60% of Rio's capital is financed through debt which has a cost of 7% and shareholders require a 5% premium on what creditors earn. Does the new iron ore mine add to shareholders wealth? The NPV of the mine is and the IRR is If your answers do not correspond exactly with any of the NPV or IRR choices, select the closest answer. If you have done the math correctly, your answer may be off due to rounding errors. QANTAS Qantas WACC 13% Total Capital Available 100 mil Potential Assets Boeing 787 Price: 90mil. FCF = 17.5mil/yr for 8 yrs A380 Price: 120mil. FCF = 20mil/yr for 8 yrs Boeing 747 Price: 50mil. FCF = 13mil/yr for 6 yrs A330 Price: 50mil. FCF = 12.6mil/yr for 6 yrs Vince, the CFO, then asks... "So which asset would you recommend and how many should be buy using only IRR?" FCF stands for Free Cash Flow, an estimate of Net Cash flow that is available to service capital costs. I would recommend buying where the IRR of such an acquisition is