Homework 3 BF722, Spring 2012

May 5th, 2015
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Problem Sets 1. You are going to invest for one period. You can invest in two risky stocks: Krispy Kreme (KK) and General Motors (GM). The sky opens and the following is written: State Good Economy Bad Economy Probability 0.50 0.50 rkk 20% 0% rgm 10% 5%

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HomeworkChapter 13:13.4CF0 = (110,000) ; CF1-CF10 = 19,000 ; WACC = 10%NPV = 6,746.78 ; The company should replace the old machine for a new one.13.6Year 0 Net Cash Flow = Machine Price + Cost of Install + Increase in Net Working CapitalYear 0 = $1,080,000 + $22,500 + $15,500 = ($1,118,000)Depreciation Year 1 = ($1,080,000 + $22,500) x 0.3333 = $367,463 Depreciation Year 2 = ($1,080,000 + $22,500) x 0.4445 = $409,061 Depreciation Year 3 = ($1,080,000 + $22,500) x 0.1481 = $163, 280Net Operating Cash Flow for Year 1 = $375,612 ; Year 2 = $418,521 ; Year 3 = $304,148Book Value of the Asset = ($1,080,000 + $22,500) ($367,463 + $490,061 + $163,280) = $81,696Net Gain = (($605,000) ($81,696)) x (1- 0.35) = $340,147After-tax Net Salvage Value = $81,696 + $340,147 = $421,843Additional Cash Flow = $421,843 + $15,500 = $437,343Cash Flow in Year 3 = $304,148 + $437,343 =

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