1.

value:
1.00 points

Problem 12-2 Cash flow [LO2]

Assume a corporation has earnings before depreciation and taxes of $123,000 depreciation of $41,000
and is in a 35 percent tax bracket.

(a) How much would cash flow be if there were only $21,000 in depreciation? All other factors are the
same.(Omit the "$" sign in your response.)

Cash flow $

(b) How much cash flow is lost due to the reduced depreciation between $41,000 and $21,000? (Omit
the "$" sign in your response.)

Cash flow $
check my workeBook Linkreferen

2.
value:
1.00 points

Problem 12-3 Cash flow [LO2]

Assume a firm has earnings before depreciation and taxes of $650,000 and no depreciation. It is in a
40 percent tax bracket.

(a) Compute its cash flow. (Omit the "$" sign in your response.)

Cash flow $

(b) Assume it has $650,000 in depreciation. Recompute its cash flow. (Omit the "$" sign in your
response.)

Cash flow $

(c) How large a cash flow benefit did the depreciation provide? (Omit the "$" sign in your response.)

Benefit in cash flow $

check my workeBook LinkView Hint #1

3.
value:
1.00 points
Problem 12-4 Cash flow [LO2]
Assume a firm has earnings before depreciation and taxes of $470,000 and depreciation of $170,000.

(a) If the firm is in a 35 percent tax bracket, compute its cash flow. (Omit the "$" sign in your
response.)

Cash flow $

(b) If it is in a 20 percent tax bracket, compute its cash flow. (Omit the "$" sign in your response.)

Cash flow $
check my workeBook Linkre

4.
value:
1.00 points

Problem 12-6 Payback method [LO3]

Assume a $290,000 investment and the following cash flows for two products:

Year Product X Product Y

1 $100,000 $ 90,000
2 100,000 100,000
3 75,000 80,000
4 40,000 40,000

(a) Calculate the payback for products X and Y. (Round your answers to 2 decimal places.)

Payback period
Product X years
Product Y years

(b) Which alternative would you select under the payback method?

Product X
Product Y

5.
value:
1.00 points
Problem 12-9 Payback method [LO3]
The Short-Line Railroad is considering a $140,000 investment in either of two companies. The cash
flows are as follows:

Year Electric Co. Water Works

1 $ 85,000 $ 30,000
2 25,000 25,000
3 30,000 85,000
4 – 10 10,000 10,000

(a) Compute the payback period for both companies. (Round your answers to 1 decimal place.)

Payback period
Electric Co. years
Water Works years

(b) Which of the investments is superior from the information provided?

Both
Electric Co.
Water Works

6.
value:
2.00 points

Problem 12-10 Payback and net present value [LO3, 4]

Diaz Camera Company is considering two investments, both of which cost $14,000. The cash flows are
as follows:
Use Appendix B.

Year Project A Project B

1 $8,000 $7,000
2 6,000 5,000
3 4,000 9,000

(a-1) Calculate the payback period for project A and project B. (Round your answers to 2 decimal
places.)

Payback period
Project A years
Project B years

(a-2) Which of the two projects should be chosen based on the payback method?
 Project A
Project B

(b-1) Calculate the net present value for project A and project B. Assume a cost of capital of 8
percent.(Round "PV Factor" to 3 decimal places, intermediate and final answers to the
nearest dollar amount. Omit the "$" sign in your response.)

Net present value

Project A $
Project B $

(b-2) Which of the two projects should be chosen based on the net present value method?

Project B
Project A

(c) Should a firm normally have more confidence in answer derived based on Net present value
method or Payback method?

Net present value method

Payback method

7.
value:
1.00 points

Problem 12-11 Internal rate of return [LO4]

You buy a new piece of equipment for $22,816, and you receive a cash inflow of $3,100 per year for 10
years. Use Appendix D.

What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round your answer to
the nearest whole percent. Omit the "%" sign in your response.)

Internal rate of return %

8.
value:
1.00 points
Problem 12-13 Internal rate of return [LO4]
Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $52,000.
The annual cash inflows for the next three years will be:

Year Cash flow

1 $ 26,000
2 24,000
3 19,000

(a) Determine the internal rate of return using interpolation. Use Appendix D. (Round "PV Factor" and
intermediate to 3 decimal places. Round final answer to 2 decimal places. Omit the "%" sign in
your response.)
Internal rate of return %

(b) With a cost of capital of 14 percent, should the machine be purchased?

Ye
s
No

9.
value:
1.00 points

Problem 12-14 Net present value method [LO4]

Altman Hydraulic Corporation will invest $156,000 in a project that will produce the cash flow shown
below. The cost of capital is 11 percent. (Note that the third year's cash flow is negative.)
Use Appendix B.

Year Cash flow

1 $ 52,000
2 62,000
3 (56,000)
4 55,000
5 120,000

(a) What is the net present value of the project? (Round "PV Factor" to 3 decimal places. Round
intermediate and final answer to the nearest dollar amount. Negative amount should be
indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(b) Should the project be undertaken?

Yes
No
10.
value:
2.00 points

Problem 12-18 Net present value and internal rate of return methods [LO4]
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the
speed of bottling and save money. The net cost of this machine is $55,000. The annual cash flows have
the following projections: Use Appendix B and Appendix D.

Year Cash flow

1 $ 16,000
2 21,000
3 26,000
4 11,000
5 6,000

(a) If the cost of capital is 9 percent, what is the net present value of selecting a new machine? (Round
"PV Factor" to 3 decimal places. Round all dollar values to the nearest dollar amount. Omit the
"$" sign in your response.)

Net present value $

(b) What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round all dollar
values to the nearest dollar amount. Round your answer to 2 decimal places. Omit the "%"
sign in your response.)

Internal rate of return %

(c) Should the project be accepted?

Yes
No

Ye
s
No

Ye
s
No

9.
value:
1.00 points
Problem 12-14 Net present value method [LO4]
Altman Hydraulic Corporation will invest $156,000 in a project that will produce the cash flow shown
below. The cost of capital is 11 percent. (Note that the third year's cash flow is negative.)
Use Appendix B.

Year Cash flow

1 $ 52,000
2 62,000
3 (56,000)
4 55,000
5 120,000

(a) What is the net present value of the project? (Round "PV Factor" to 3 decimal places. Round
intermediate and final answer to the nearest dollar amount. Negative amount should be
indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(b) Should the project be undertaken?

Yes
No

10.
value:
2.00 points

Problem 12-18 Net present value and internal rate of return methods [LO4]
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the
speed of bottling and save money. The net cost of this machine is $55,000. The annual cash flows have
the following projections: Use Appendix B and Appendix D.

Year Cash flow

1 $ 16,000
2 21,000
3 26,000
4 11,000
5 6,000

(a) If the cost of capital is 9 percent, what is the net present value of selecting a new machine? (Round
"PV Factor" to 3 decimal places. Round all dollar values to the nearest dollar amount. Omit the
"$" sign in your response.)

Net present value $

(b) What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round all dollar
values to the nearest dollar amount. Round your answer to 2 decimal places. Omit the "%"
sign in your response.)
 Internal rate of return %

(c) Should the project be accepted?

Yes
No

11.
value:
1.00 points

Problem 12-19 Use of profitability index [LO4]

You are asked to evaluate the following two projects for the Norton Corporation. Use a discount rate of
14 percent. Use Appendix B.

Project X (Videotapes Project Y (Slow-motion

of the weather report) replays of commercials)
($20,000 investment) ($40,000 investment)
Year Cash flow Year Cash flow
1 $ 10,000 1 $ 20,000
2 8,000 2 13,000
3 9,000 3 14,000
4 8,600 4 16,000

(a) Calculate the profitability index for project X. (Round "PV Factor" to 3 decimal places. Round your
"present value inflows" to the nearest whole dollar amount. Round your final answer to 2
decimal places.)

Profitability index

(b) Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round your
"present value inflows" to the nearest whole dollar amount. Round your final answer to 2
decimal places.)

Profitability index

(c) Using the net present value method, combined with the profitability index approach, which project
would you select?

Project X
Project Y
12.
value:
1.00 points

You received credit for this question in a previous attempt

Problem 12-20 Reinvestment rate assumption in capital budgeting [LO4]
Turner Video will invest $66,500 in a project. The firm's cost of capital is 12 percent. The investment will
provide the following inflows. Use Appendix A.

Year Inflow

1 $ 19,000

2 21,000

3 25,000

4 29,000

5 33,000

(a) If the reinvestment assumption of the net present value method is used, what will be the total value of
the inflows after five years? (Assume the inflows come at the end of each year.) (Round "FV Factor"
to 3 decimal places, intermediate and final answers to the nearest whole dollar amount.Omit
the "$" sign in your response.)

Total value of inflows $

(b) If the firm is able to earn 13 percent on reinvested funds, what will be the total value of the inflows
after five years? (Round "FV Factor" to 3 decimal places, intermediate and final answers to the
nearest whole dollar amount.Omit the "$" sign in your response.)

Total value of inflows $

(c) Which investment assumption is better?

Reinvestment assumption of IRR

 Reinvestment assumption of NPV

13.
award:
0 out of
1.00 point

Problem 12-22 Capital rationing and mutually exclusive investments [LO4]

The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm’s
cost of capital is 10 percent. It will only invest $80,600 this year. It has determined the internal rate of
return for each of the following projects.

Internal rate
Project Project size of return
A $ 11,400 20%
B 31,400 22
C 26,400 12
D 11,400 14
E 11,400 16
F 21,400 19
G 16,400 17

(a) Pick out the projects that the firm should accept. (You may select more than one answer. Click the
box with a check mark for the correct answer and click to empty the box for the wrong
answer.)

Project E
Project D
Project F
Project A
Project B
Project C
Project G

(b) If Projects A and B are mutually exclusive, which projects would you accept in spending
$80,600? (You may select more than one answer. Click the box with a check mark for the
correct answer and click to empty the box for the wrong answer.)

Project E
Project A
Project F
Project C
Project B
Project D
Project G
14.
award:
1.60 out of
2.00 points

Problem 12-23 Net present value profile [LO4]

Keller Construction is considering two new investments. Project E calls for the purchase of earth moving
equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present
value profile in comparing the projects. The investment and cash flow patterns are as follows:
Use Appendix B.

Project E Project H
($35,000 investment) ($37,000 investment)
Year Cash flow Year Cash flow
1 $ 8,000 1 $ 19,000
2 13,000 2 16,000
3 19,000 3 15,000
4 21,000

(a) Determine the net present value of the projects based on a zero discount rate. (Omit the "$" sign in
your response.)

Net present value

Project E $
Project H $

(b) Determine the net present value of the projects based on a 13 percent discount rate. (Round "PV
Factors" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign
in your response.)

Net present value

Project E $
Project H $

(d) If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if
the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no
actual numbers are necessary.)
15.
value:
4.00 points

Problem 12-25 MACRS depreciation and cash flow [LO2]

Telstar Communications is going to purchase an asset for $720,000 that will produce $350,000 per year
for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the
three-year MACRS depreciation schedule in Use Table 12–9. (This represents four years of depreciation
based on the half-year convention.) The firm is in a 35 percent tax bracket.

Fill in the schedule below for the next four years. (Round "Percentage depreciation" to 3 decimal
places. Round all dollar values to the nearest whole number. Input all amounts as positive values.
Omit the "$" sign in your response.)

Earnings before depreciation and taxes

Depreciation

Earnings before taxes

Taxes

Earnings after taxes

+ Depreciation

Cash flow

16.
value:
2.00 points

You received credit for this question in a previous attempt

Problem 12-27 MACRS depreciation and net present value [LO4]
The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS
depreciation. The cost is $390,000 and the asset will provide the following stream of earnings before
depreciation and taxes for the next four years: Use Table 12-9.
rev:4_5_2013_QC_29129

Year 1 $ 206,000

Year 2 254,000

Year 3 86,000

Year 4 78,000

The firm is in a 40 percent tax bracket and has an 12 percent cost of capital. Use Appendix B

(a) Calculate the net present value. (Round "PV Factor" to 3 decimal places, intermediate
calculations and final answer to the nearest whole dollar amount. Omit the "$" sign in your
response.)

Net present value $

(b
Under the net present value method, should Summit Petroleum Corporation purchase the asset?
)

Ye
s

No

17.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 12-30 Working capital requirements in capital budgeting [LO4]
The Bagwell Company has a proposed contract with the First Military Base Facility of Texas. The initial
investment in land and equipment will be $185,000. Of this amount, $160,000 is subject to five-year
MACRS depreciation. The balance is in nondepreciable property (land). The contract covers a 6 year
period. At the end of 6 years the nondepreciable assets will be sold for $39,000. The depreciated assets
will have zero resale value. Use Table 12-9 and Appendix B.

The contract will require an additional investment of $49,000 in working capital at the beginning of the
 first year and, of this amount, $29,000 will be returned to the Bagwell Company after six years.

The investment will produce $61,000 in income before depreciation and taxes for each of the six years.
The corporation is in a 40 percent tax bracket and has a 6 percent cost of capital.

(a) Calculate the net present value. (Round "Percentage depreciation" and "PV Factor" to 3 decimal
places. Round all dollar values to the nearest whole number. Omit the "$" sign in your
response.)

Net present value $

(b) Should the investment be undertaken?

Yes

No

18.
value:
2.00 points

Problem 12-31 Tax losses and gains in capital budgeting [LO2]

An asset was purchased three years ago for $195,000. It falls into the five-year category for MACRS
depreciation. The firm is in a 30 percent tax bracket. Use Table 12–9.

(a) Compute the tax loss on the sale and the related tax benefit if the asset is sold now for
$22,560.(Round "Percentage depreciation" to 3 decimal places. Input all amounts as positive
values. Omit the "$" sign in your response.)

Tax loss on the sale $

Tax benefit $
(b) Compute the gain and related tax on the sale if the asset is sold now for $71,060. (Round
"Percentage depreciation" to 3 decimal places. Input all amounts as positive values. Omit the
"$" sign in your response.)

Taxable gain $

Tax obligation $

19.
award:
2.15 out of
3.00 points

Problem 12-32 Capital budgeting with cost of capital computation [LO5]

DataPoint Engineering is considering the purchase of a new piece of equipment for $390,000. It has an
eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of
$210,000 in nondepreciable working capital. Seventy two thousand five hundred dollars of this
investment will be recovered after the sixth year and will provide additional cash flow for that year.
Income before depreciation and taxes for the next six years will be: Use Table 12–9 and Appendix B.

Year Amount
1 $ 230,000
2 190,000
3 160,000
4 145,000
5 110,000
6 100,000

The tax rate is 40 percent. The cost of capital must be computed based on the following:

Cost
(aftertax) Weights
Debt Kd 9.20% 20%
Preferred stock Kp 13.80 10
Common equity
(retained earnings) Ke 18.00 70

(a) Determine the annual depreciation schedule. (Round "Percentage depreciation" to 3 decimal
places. Round all dollar values to the nearest whole number. Omit the "$" sign in your
response.)

Year Depreciation Percentage Annual

 base depreciation depreciation
1
2
3
4
5
6

(b) Determine annual cash flow. Include recovered working capital in the sixth year. (Round all dollar
values to the nearest whole number. Omit the "$" sign in your response.)

Year Cash flow

1 $
2

(c) Determine the weighted average cost of capital. (Round your intermediate calculations and final
answer to 2 decimal places. Omit the "%" sign in your response.)

Weighted average cost of capital %

(d)Determine the net present value. (Round "PV Factor" to 3 decimal places. Round your
intermediate and final answer to the nearest whole number. Negative amount should be
indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(e)Should DataPoint purchase the new equipment?

20.
value:
5.00 points

Problem 12-33 Replacement decision analysis [LO4]

Hercules Exercising Equipment Co. purchased a computerized measuring device two years ago for
$86,000. The equipment falls into the five-year category for MACRS depreciation and can currently be
sold for $38,800.
 A new piece of equipment will cost $270,000. It also falls into the five-year category for MACRS
depreciation.

Assume the new equipment would provide the following stream of added cost savings for the next
six years. Use Table 12–9 and Appendix B.

Year Cash flow

1 $65,000

2 55,000

3 53,000

4 51,000

5 48,000

6 37,000

The firm’s tax rate is 30 percent and the cost of capital is 11 percent.

What is the book value of the old equipment? (Round "Percentage depreciation" to 3 decimal
(a)
places. Omit the "$" sign in your response.)

Book value $

(b) What is the tax loss on the sale of the old equipment? (Omit the "$" sign in your response.)

Tax loss $

(c) What is the tax benefit from the sale? (Omit the "$" sign in your response.)
 Tax benefit $

(d) What is the cash inflow from the sale of the old equipment? (Omit the "$" sign in your response.)

Cash inflow $

(e) What is the net cost of the new equipment? (Include the inflow from the sale of the old
equipment.)(Omit the "$" sign in your response.)

Net cost $

(f) Determine the depreciation schedule for the new equipment. (Round "Percentage depreciation" to
3 decimal places. Omit the "$" sign in your response.)

Depreciation Percentage Annual

Year base depreciation depreciation

1 $ $

$
(g) Determine the depreciation schedule for the remaining years of the old equipment. (Round
"Percentage depreciation" to 3 decimal places. Omit the "$" sign in your response.)

Depreciation Percentage Annual

Year base depreciation depreciation

1 $ $

(h) Determine the incremental depreciation between the old and new equipment and the related tax
shield benefits. (Round all dollar values to the nearest whole number. Round "Tax rate" to 2
decimal places. Omit the "$" sign in your response.)

Depreciation Depreciation
on new on old Incremental Tax shield
Year equipment equipment depreciation Tax rate benefits

1 $ $ $ $

6
(i) Compute the aftertax benefits of the cost savings. (Round "Tax rate" to 2 decimal places. Omit the
"$" sign in your response.)

After tax
Year Savings (1 − Tax rate) savings

1 $65,000 $

2 55,000

3 53,000

4 51,000

5 48,000

6 37,000

(j) Add the depreciation tax shield benefits and the aftertax cost savings, and determine the present
value.(Round "PV Factor" to 3 decimal places. Round your intermediate and final answers to
the nearest whole dollar amount. Omit the "$" sign in your response.)

Tax shield
benefits from After tax Total annual Present value
Year depreciation cost savings benefits factor Present value

1 $ $ $

6
 $

(k) Compare the present value of the incremental benefits (j) to the net cost of the new equipment
(e).(Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(l) Should the replacement be undertaken?

No

Yes

21.
value:
1.00 points
Problem 13-1 Risk-averse [LO2]
Assume you are risk-averse and have the following three choices.

Expected Standard
Projects value deviation
A $2,010 $1,700
B 2,420 2,260
C 2,180 1,340

(a) Compute the coefficient of variation for each. (Round your answers to 2 decimal places.)

Coefficient of
Projects variation
A

(b) Which project will you select?

 Project A
Project B
Project C

22.
value:
1.00 points
Problem 13-2 Expected value and standard deviation [LO1]
Lowe Technology Corp. is evaluating the introduction of a new product. The possible levels of unit sales
and the probabilities of their occurrence are given.

Possible Sales in
market reaction units Probabilities
Low response 20 .30
Moderate response 35 .20
High response 45 .20
Very high response 60 .30

(a) What is the expected value of unit sales for the new product? (Round your answer to 2 decimal
places.)

Expected value

(b) What is the standard deviation of unit sales? (Round your final answer to 2 decimal places.)

Standard deviation

23.
award:
0 out of
1.00 point

Problem 13-4 Coefficient of variation [LO1]

Shack Homebuilders, Limited, is evaluating a new promotional campaign that could increase home
sales. Possible outcomes and probabilities of the outcomes are shown below.

Additional
Possible outcomes sales in units Probabilities
Ineffective campaign 20 .40
Normal response 110 .40
Extremely effective 140 .20

Compute the coefficient of variation. (Round your answer to 3 decimal places.)

Coefficient of variation
24.
value:
2.00 points
Problem 13-7 Coefficient of variation [LO1]
Five investment alternatives have the following returns and standard deviations of returns.

Returns: Standard
Alternatives Expected value deviation
A $ 1,280 $ 1,150
B 1,790 1,490
C 12,300 2,200
D 1,310 1,350
E 65,400 19,400

Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk by
using the coefficient of variation. (Round your answers to 2 decimal places.)

Coefficient of
Alternatives variation Rank
A (Click to select)

B (Click to select)

C (Click to select)

D (Click to select)

25.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-10 Coefficient of variation and time [LO1]
Sensor Technology wishes to determine its coefficient of variation as a company over time. The firm
projects the following data (in millions of dollars):

Profits: Standard
Year Expected value deviation
1 $ 93 $ 34
3 157 65
6 206 98
9 226 120

(a) Compute the coefficient of variation (V) for each time period. (Round your answers to 2 decimal
places.)

Coefficient of
Year variation
 1

(b
Does the risk (V) appear to be increasing over a period of time?
)

Ye
s
No

26.
value:
2.00 points
Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

Returns: Standard
Investments Expected value deviation
Buy stocks $ 9,010 $ 6,470
Buy bonds 7,030 2,460
Buy commodity futures 26,800 23,900
Buy options 21,200 21,500

(a-1) Compute the coefficients of variation. (Round your answers to 3 decimal places.)

Coefficient of
variation
Buy stocks

Buy bonds

Buy commodity futures

Buy options

(a-2) Which one of the following four investments should Tim choose?

Buy bonds
Buy stocks
Buy commodity futures
Buy options

(b) Which one of the four investments should Mike choose?

 Buy bonds
Buy stocks
Buy options
Buy commodity futures

27.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-13 Coefficient of variation and investment decision [LO1]
Kyle's Shoe Stores, Inc., is considering opening an additional suburban outlet. An aftertax expected cash
flow of $100 per week is anticipated from two stores that are being evaluated. Both stores have positive
net present values.

Site A
Probability Cash flows
.20 50
.40 100
.25 110
.15 150

Site B
Probability Cash flows
.10 20
.20 50
.40 100
.20 150
.10 180

(a) Compute the coefficient of variation for each site. (Do not round intermediate calculations. Round
your answers to 4 decimal places.)

Coefficient of
variation
Site A

Site B

(b) Which store site would you select based on the distribution of these cash flows? Use the coefficient of
variation as your measure of risk.

Site A
Site B
28.
value:
1.00 points

Problem 13-14 Risk-adjusted discount rate [LO3]

Micro Systems is evaluating a $59,100 project with the following cash flows.

Years Cash flows

1 $ 9,180

2 13,100

3 21,700

4 19,400

5 25,600

The coefficient of variation for the project is .654.

Coefficient of
variation Discount rate

0 − .25 7%

.26 − .50 11

.51 − .75 15

.76 − 1.00 17

1.01 − 1.25 20

(a-1)
Select the appropriate discount rate.

7%
 11%

15%

17%

20%

(a-2) Compute the net present value. Use Appendix B. (Round "PV Factor" to 3 decimal places,
intermediate and final answers to the nearest dollar amount. Negative amount should be
indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(b) Based on the net present value should the project be undertaken?

No

Yes

29.
value:
1.00 points

Problem 13-16 Discount rate and timing [LO1]

(a) Fill in the table below from Appendix B. (Round your answers to 3 decimal places.)

Discount rate

Years 10% 18%

10

20
(b) What is the impact of a high discount rate on long-term inflows?

Greater on long-term value

Lesser on long-term value

30.
value:
1.00 points

Problem 13-17 Expected value with net present value [LO1]

Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the
popularity of its aerobics dancing. The equipment will cost $22,400. Debby is not sure how many
members the new equipment will attract, but she estimates that her increased annual cash flows for each
of the next five years will have the following probability distribution. Debby’s cost of capital is 12 percent.

Cash flow Probability

$ 3,890 .3

5,330 .2

8,390 .2

9,880 .3

(a) What is the expected value of the cash flow? (Omit the "$" sign in your response.)

Expected cash flow $

(b) What is the expected net present value? Use Appendix D. (Round "PV Factor" to 3 decimal places,
intermediate and final answers to the nearest dollar amount. Negative amount should be
indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(c) Should Debby buy the new equipment?

Yes

No

31.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-18 Deferred cash flows and risk-adjusted discount rate [LO3]
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment
will be made. The Australian gold mine will cost $1,630,000 and will produce $306,000 per year in years
5 through 15 and $572,000 per year in years 16 through 25. The U.S. gold mine will cost $2,012,000 and
will produce $270,000 per year for the next 25 years. The cost of capital is 10 percent.

(a-1) Calculate the net present value for each project. (Round "PV Factor" to 3 decimal places,
intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your
response.)

Net present value

The Australian Mine $
The U.S. Mine $

(a-2) Which investment should be made?

Australian Mine
U.S. Mine

(b-1) If the Australian Mine justifies an extra 1 percent premium over the normal cost of capital because
of its riskiness and the relative uncertainty of cash flows, recalculate the net present value of the
mine.(Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest
dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in
your response.)

Net present value

The Australian Mine $

(b-2) Does the investment decision change?

Yes
No
32.
value:
2.00 points

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Problem 13-20 Risk-adjusted discount rate [LO3]
Mr. Sam Golff desires to invest a portion of his assets in rental property. He has narrowed his choices
down to two apartment complexes, Palmer Heights and Crenshaw Village. After conferring with the
present owners, Mr. Golff has developed the following estimates of the cash flows for these properties.

Palmer Heights
Yearly aftertax
cash inflow
(in thousands) Probability
$ 90 .2
95 .2
110 .2
125 .2
130 .2

Crenshaw Village
Yearly aftertax
cash inflow
(in thousands) Probability
$ 95 .2
100 .3
110 .4
120 .1

Mr. Golff is likely to hold the complex of his choice for 30 years, and he will use this time period for
decision-making purposes. Either apartment complex can be acquired for $206,000. Mr. Golff uses a
risk-adjusted discount rate when considering investments. His scale is related to the coefficient of
variation.

Coefficient of
variation Discount rate
0 – 0.20 5 %
(cost of
0.21 – 0.40 8
capital)
0.41 – 0.60 12
Over 0.60 16

(a) Compute the risk-adjusted net present values for Palmer Heights and Crenshaw Village. (Omit the
"$" sign in your response.)

Net present value

Palmer Heights $
Crenshaw Village $

(b-1) Which investment should Mr. Golff accept if the two investments are mutually exclusive?
 Crenshaw Village
Palmer Heights
Both
None

(b-2) Which investment should Mr. Golff accept If the investments are not mutually exclusive and no
capital rationing is involved?

Palmer Heights
Crenshaw Village
Both
None

33.
value:
1.00 points
Problem 13-21 Decision-tree analysis [LO4]
Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to
expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere
sweater market with a new line of high-quality designer label products. The marketing department has
determined that the wool and cashmere sweater lines offer the following probability of outcomes and
related cash flows.

EXPAND WOOL ENTER CASHMERE

SWEATERS LINE SWEATERS LINE
Present value Present value
of cash flows of cash flows
Expected sales Probability from sales Probability from sales
Fantastic .3 $262,000 .3 $378,000
Moderate .3 194,000 .3 239,000
Low .4 88,100 .4 0

The initial cost to expand the wool sweater line is $161,000. To enter the cashmere sweater line the
initial cost in designs, inventory, and equipment is $136,000.

(a) Calculate Net present value. (Negative amounts should be indicated by a minus sign. Omit the
"$" sign in your response.)

Net present value

Expand wool sweaters line $
Enter cashmere sweaters line $
34.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-22 Probability analysis with a normal curve distribution [LO4]
When returns from a project can be assumed to be normally distributed (represented by a symmetrical,
bell-shaped curve), the areas under the curve can be determined from statistical tables based on
standard deviations. For example, 68.26 percent of the distribution will fall within one standard deviation
of the expected value ( ± 1σ). Similarly 95.44 percent will fall within two standard deviations (
± 2σ), and so on. An abbreviated table of areas under the normal curve is shown here.

Number of σ's
from expected
value + or – + and –
.50 .1915 .3830
1.00 .3413 .6826
1.50 .4332 .8664
1.75 .4599 .9198
2.00 .4772 .9544

Assume Project A has an expected value of $34,000 and a standard deviation ( σ ) of $6,800.

(a) What is the probability that the outcome will be between $23,800 and $44,200? (Round your answer
to 4 decimal places.)

Probability .8664

(b) What is the probability that the outcome will be between $20,400 and $47,600? (Round your answer
to 4 decimal places.)

Probability .9544

(c) What is the probability that the outcome will be at least $20,400? (Round your answer to 4 decimal
places.)

Probability .9772

(d) What is the probability that the outcome will be less than $45,920? (Round your answer to 4
decimal places.)

Probability .8770

(e) What is the probability that the outcome will be less than $30,600 or greater than $40,800? (Round
your answer to 4 decimal places.)

Probability 0.617
35.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-23 Increasing risk over time [LO1]
The Oklahoma Pipeline Company projects the following pattern of inflows from an investment. The
inflows are spread over time to reflect delayed benefits. Each year is independent of the others.

Year 1 Year 5 Year 10

Cash inflow Probability Cash inflow Probability Cash inflow Probability

35 .40 20 .35 50 .40
60 .20 60 .30 60 .40
85 .40 100 .35 110 .20

The expected value for all three years is $60.

(a) Compute the standard deviation for each of the three years. (Round your answers to 2 decimal
places.)

Standard deviation
Year 1

Year 5

Year 10

36.
value:
1.00 points
Problem 13-24 Portfolio effect of a merger [LO5]
Treynor Pie Co. is a food company specializing in high-calorie snack foods. It is seeking to diversify its
food business and lower its risks. It is examining three companies—a gourmet restaurant chain, a baby
food company, and a nutritional products firm. Each of these companies can be bought at the same
multiple of earnings. The following represents information about the companies.

Correlation
with Expected Standard deviation
Treynor Pie Sales earnings($ in earnings
Company company ($ millions) millions) ($ millions)
Treynor Pie Company +1.0 $ 182 $ 9 $ 3.0
Gourmet restaurant + .5 63 9 1.2
Baby food company + .3 54 6 1.7
Nutritional products company − -.6 75 7 3.8

(a-1) Compute the coefficient of variation for each of the four companies. (Round your answers to 2
decimal places.)

Coefficient of
 variation
Treynor Pie Company

Gourmet restaurant 0

Baby food company 0.

Nutritional products company 0.

(a-2) Which company is the least risky?

Gourmet restaurant
Baby food company
Nutritional products company
Treynor Pie Company

(a-3) Which company is the most risky?

Baby food company

Gourmet restaurant
Nutritional products company
Treynor Pie Company

(b) Which of the acquisition candidates is most likely to reduce Treynor Pie Company's risk?

Nutritional products company

Gourmet restaurant
Baby food company

37.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-25 Portfolio effect of a merger [LO5]
Transoceanic Airlines is examining a resort motel chain to add to its operation. Prior to the acquisition,
the normal expected outcomes for the firm are as follows:

Outcomes
($ millions) Probability
Recession $35 .40
Normal economy 55 .20
Strong economy 75 .40
(a) Compute the expected value, standard deviation, and coefficient of variation. (Enter your answer in
millions. Round Standard deviation to 2 decimal places and final answer to 3 decimal
places.Omit the "$" sign in your response.)

Expected value $
Standard deviation $
Coefficient of variation

38.
value:
1.00 points

You did not receive credit for this question in a previous attempt
Problem 13-27 Certainty equivalent approach [LO1]
Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the
family business, Goodman Software Products, Inc., as vice president of finance.
She believes in adjusting projects for risk. Her father is somewhat skeptical but agrees to go along
with her. Her approach is somewhat different than the risk-adjusted discount rate approach, but achieves
the same objective.
She suggests that the inflows for each year of a project be adjusted downward for lack of certainty
and then be discounted back at a risk-free rate. The theory is that the adjustment penalty makes the
inflows the equivalent of riskless inflows, and therefore a risk-free rate is justified.
A table showing the possible coefficient of variation for an inflow and the associated adjustment factor
is shown below:

Coefficient of Adjustment
variation factor

0 – .25 .90

.26 – .50 .80

.51 – .75 .70

.76 – 1.00 .60

1.01 – 1.25 .50

Assume a $180,000 project provides the following inflows with the associated coefficients of variation
for each year.

Coefficient of
Year Inflow variation

1 $31,800 .15

2 53,200 .23

3 77,000 .52

4 59,100 .71

5 66,100 1.10

(a) Fill in the table below (Round "Adjustment factor" to 2 decimal places. Omit the "$" sign in
your response):

Year Adjustment factor Adjusted Inflow

1 $

(b-1) If the risk-free rate is 5 percent, compute the net present value of the adjusted inflows. Use Appendix B. (Round
"PV Factor" to 3 decimal places, intermediate and final answers to the nearest whole dollar amount.
Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

(b-2) Should this project be accepted?

No

Yes