1. Each person in the class must submit his/her individual assignment.
2. Attach a covering page to the front of your assignment giving your name, course
number, section number (B1 or B2), and instructor’s name.
3. Hand in your assignment at the assignment drop-off box located outside the
General Office on the third floor of the School of Business building. Be sure to
place your assignment in the slot that is allocated for the class (FIN 422 B1 or
FIN 422 B2).
4. Do not write down a single number solution to a question. Show your work, that
is, show the important elements of your solution.
5. In an effort to reduce round-off error, carry any calculations to at least four
decimal places.
Note: Assignments handed in after 3:00 p.m. on the due date will not be accepted.
________________________________________________________________________
1. Enrique Rodrigues has $65,000 this year. He faces the investment opportunities
represented by point B in the following figure. He wants to consume $22,000 this year
and $65,100 next year. This pattern of consumption is represented by point F.
(a) [1] What is the market interest rate?
(b) [2] How much must Enrique invest in financial assets and productive assets today if
he follows an optimum strategy? Note: Productive assets are nonfinancial assets or real
assets.
(c) [1] What is the NPV of his investment in nonfinancial assets?
HINT: In the diagram that follows, sketch the investment opportunities curve. It begins
at the point on the horizontal axis labelled $65,000 and is tangent to the straight line with
slope
(1 )r at point B.
Note:
The coordinates of point D are (0; $91,500).
The coordinates of point F are ($22,000; $65,100).
The coordinates of point B are ($32,500; $52,500).
The coordinates of point A are ($65,000; $13,500).
The coordinates of point C are ($76,250; 0).
2. [4] A capital investment project will require an initial outlay of $55,000 and is
expected to generate an after-tax net cash flow of $7,500 in one year. After-tax net cash
flows are then expected to grow at a rate of “g” per year for 5 years, ending 6 years from
today. In each year after that in perpetuity, after-tax net cash flows are expected to grow
at a fixed rate of 1.5% per year. The project’s cost of capital is 21%.
If the terminal value of the project at the end of year 6 is $53,486.08, what is the project’s
NPV?
Note: Terminal value at the end of year 6 is the value at that time of the after-tax net cash
flows that the project is expected to generate after that date.
3. (a) [12] In 2011, WestJet Airlines Ltd. considered adding a new short-haul, low-cost,
regional airline to its fleet. The regional airline would use a turbo-prop aircraft, allowing
WestJet to provide service to new, smaller communities where the larger 737 aircraft did
not make sense economically.
You have been assigned the task of determining the net cash flows, NPV, and IRR of the
proposed regional airline. To conduct the required analysis, refer to the financial
statements given in the Excel file “Assignment1wjaDATAw14” posted to the class
website in uLearn, under Assignments. Use the data for FY 2011.
Build an Excel worksheet with a column for each year of the expected life of the project.
(Note: Consider how depreciation is to be measured when identifying the number of
columns to include in the worksheet.) For each year, derive free cash flow using the
formula:
No comments:
Post a Comment