Two mutually exclusive investments cost $10,000 each and have the following cash inflows....
Question # 00051837
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Updated on: 03/03/2015 11:22 AM Due on: 06/30/2015
1. Two mutually exclusive investments cost $10,000 each and have
the following cash inflows. The firm’s cost of capital is 10%.
A. What is the net present value of each investment?
B. What is the internal rate of return of each investment?
C. Which investment(s) should the firm make?
D. Would your answers be different to C if the funds received
in Year 2 for investment A could be reinvested at 16%?
Show your work.
Investment
Cash inflow A B
Year 1 — —
Year 2 $15,407 —
Year 3 — —
Year 4 — $19,3902
2. Given the following information, answer the following questions:
TR = $3Q
TC =$1,200 + $2Q
A. What is the break-even level of output?
B. If the firm sells 1,300 units, what are its earnings or losses?
C. If sales rise to 2,000 units, what are the firm’s earnings or losses?
D. If the total cost equation were TC $2,000 $1.80Q, what happens to the breakeven
level of output units?
3. Determine the current market prices of the following $1,000 bonds if the comparable rate
is 10% and answer the following questions.
Be sure you show your work here for the price and current yield and then answer
the questions below.
XY 5.25% (interest paid annually) for 20 years
AB 14% (interest paid annually) for 20 years
A. Which bond has a current yield that exceeds the yield to maturity?
B. Which bond may you expect to be called? Why?
C. If CD, Inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was
lower rated, what would be its price relative to the XY, Inc., bond? Explain.
the following cash inflows. The firm’s cost of capital is 10%.
A. What is the net present value of each investment?
B. What is the internal rate of return of each investment?
C. Which investment(s) should the firm make?
D. Would your answers be different to C if the funds received
in Year 2 for investment A could be reinvested at 16%?
Show your work.
Investment
Cash inflow A B
Year 1 — —
Year 2 $15,407 —
Year 3 — —
Year 4 — $19,3902
2. Given the following information, answer the following questions:
TR = $3Q
TC =$1,200 + $2Q
A. What is the break-even level of output?
B. If the firm sells 1,300 units, what are its earnings or losses?
C. If sales rise to 2,000 units, what are the firm’s earnings or losses?
D. If the total cost equation were TC $2,000 $1.80Q, what happens to the breakeven
level of output units?
3. Determine the current market prices of the following $1,000 bonds if the comparable rate
is 10% and answer the following questions.
Be sure you show your work here for the price and current yield and then answer
the questions below.
XY 5.25% (interest paid annually) for 20 years
AB 14% (interest paid annually) for 20 years
A. Which bond has a current yield that exceeds the yield to maturity?
B. Which bond may you expect to be called? Why?
C. If CD, Inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was
lower rated, what would be its price relative to the XY, Inc., bond? Explain.
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Rating:
/5
Solution: Two mutually exclusive investments cost $10,000 each and have the following cash inflows....