# 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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