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Assignment1_2024

Uploaded by

fcghbqn2xr
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© © All Rights Reserved
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STAT3001 Foundation of Financial and Managerial Statistics

Assignment 1 (for Chapter 2)


Deadline: 5th February 2024

Please answer all questions and write down steps clearly. Please submit online
on Blackboard.
1. (12 marks) John is considering buying a new car that is worth $150,000 through a
hire purchase agreement stretching over 24 months. The hire purchase company
will require 24 equal monthly payments (paying at the end of each month) of
$7,500 each to pay for the $150,000 borrowed, before the ownership of the car is
transferred to John.
(a) Calculate the add-on rate in the hire purchase contract.
(b) Besides engaging in the hire purchase agreement, John has an alternative of
buying the car through a mortgage arrangement (equal monthly installments
paying at the end of each month) also for 24 months. The effective annual rate of
the mortgage arrangement is 12%. Which financing tool should John choose?

2. (12 marks) The ABC company is to replace its existing machinery. It has a
choice between two new types of machines having different lives. The
machines have the following costs:
Points in time (yearly intervals) Machine X Machine Y
0 Initial investment $10,000 $15,000
1 Operating costs $4,000 $3,000
2 Operating costs $4,000 $3,000
3 Operating costs $3,000
Machine X has a life time of 2 years and Y has a life time of 3 years.
Each machine will be replaced at the end of its life by an identical machine
with identical costs. This cycle will continue indefinitely. The appropriate
discount rate is 8%. Which machine should ABC company buy?

3. (14 marks) A company with its cost of capital=6% is considering to undertake


the following projects:
Cash Flow Projection
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Project A -3200 1200 1200 1200 0 0
Project B -3000 0 0 1200 1200 1200

Find the NPV and IRR of these two projects. Which project will you
recommend the company to undertake? You may use Excel to help finding
the IRRs (no need to submit Excel file for this question).

4. (12 marks) A capital rationing problem. Suppose that a company has the
following 5 projects with estimated cash flows (in thousands) as given:
Project \ Yr 0 1 2 3 4 5
1 -100 50 40 30 20 10
2 -200 50 50 50 50 100
3 -300 150 100 50 50 100
4 -150 20 50 70 90 20
5 -100 40 40 20 20 20

1
There is a capital constraint that the company can only invest $500,000 at time
0. The discount rate to be used is 10%. Please use Excel Solver to decide on
which projects to invest in order to maximize the total NPV. Please submit
an Excel file that you used to solve this problem.

5. (20 marks) The following estimates have been made for an investment project:

Initial investment: $100,000 Unit cost of a commodity: $10


Unit price: $15 Cost of capital: 5%
Product life: 5 years
Sales volumes (in units): year 1 year 2 year 3 year 4 year 5
2000 8000 8000 8000 4000
Assess the maximum tolerable unfavorable change (as a percentage of the
original estimated value) in
(a) sales price,
(b) unit costs,
(c) sales volume,
(d) initial investment.

6. (30 marks) It is estimated that the pattern of returns on an investment project is


as follows:

Year 1: Return 5000 7000 9000


Probability 0.2 0.6 0.2
Year 2: Return 6000 7000 8000
Probability 0.3 0.4 0.3
Year 3: Return 3000 4000 5000
Probability 0.3 0.4 0.3

The returns of different years are independent. The initial investment on the
project is fixed at 12000 and the appropriate discount rate is 5%. Find the
following:
(a) the expected NPV,
(b) the variance of return in each of the years,
(c) the standard deviation of NPV,
(d) the coefficient of variation,

Now suppose that you are not given the precise probability distribution of
returns but are only given the expected NPV and standard deviation of NPV
you calculated in (a) and (c). Find:
(e) the probability that NPV is negative (state the assumption, if any, you have
made in finding the probability),
(f) the maximum tolerable value of the coefficient of variation such that the
chance of making a loss is less than 15% (state the assumption, if any, you
have made in finding the maximum tolerable value).

~~END~~

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