Description
Before starting on this assignment, make sure to thoroughly review the required background materials. Make sure you fully understand both the basic concepts as well as how to calculate payback period, NPV, IRR, and WACC. Submit your answers in a Word document. Make sure to show your work for all quantitative questions and fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 2 will require Excel. Attach an Excel file to show your computations for Questions 1 and 2.
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Explanation & Answer
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Student’s name
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Finance Questions.
Question 1 (calculations on excel).
a) Payback period.
The payback period for Project A is 4years while the payback period for Project B is 3
years. Since the payback period for Project B is less than that of Project A, Project B
should be selected since it takes a shorter time to repay the initial investment.
b) NPV.
The NPV for Project A is -$2, 092.13 while that of Project B is $2,731.88. Since the NPV
for Project A is negative, reject Project A since it leads to loses and accept Project B
since it has a positive NPV.
c) IRR.
The IRR for project A is 7.93% while the IRR for project B is 14.39%. Since the IRR for
project B is greater than the required rate of return, accept Project B and reject Project A
since its IRR is lower than the required rate of return.
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Question 2. (Calculations in excel).
a) NPV.
The NPV for Souvenir stand under the pessimistic outcome is $19,781, under the most likely
outcome, the NPV is $99,635 and under the optimistic outcome, the NPV is $179,489.
The NPV for Hot Dog and Beer stand under the pessimistic outcome is $49,635, under the most
likely outcome, the NPV is $89,562 and under the optimistic outcome, the NPV is $129,489.
Therefore, the range of possible NPV values for Souvenir stand is $19,781 to $179,489 while the
range of NPV values for the Hot Dog and Beer stand is $49,635 to $129,489
b) Decision.
Given the range of possible NPV values above, the range of NPV values for the Souvenir
stand is wider with a possibility that at one time a lowest NPV of $19,781 can be realized
and on the other extreme, a highest NPV of $179,489 can be realized. This being the
case, the Souvenir stand investment is more risky than that of the Hot Dog and Beer stand
which has a narrow gap between the highest and the lowest NPV that can be realized.
This being the case, we can say that the standard deviation for the Souvenir stand will be
higher than that of the Hot Dog and Beer stand hence select to invest in the Hot Dog and
Beer stand since its less risky.
Question 3.
Since not much is known about farming in Brazil, I would consider this investment to be a high
risk investment and as such, I would use a lot higher discount rate than the 6% to evaluate the
project of farming in Brazil. After all, we are told that the profits from farming bananas in Brazil
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are much higher than would be realized from the corn farming after buying the new machine.
Therefore, assigning a high...