Cori's Meats is looking at a new sausage system with an installed cost of $304,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $30,000. The sausage system will save the firm $116,000 per year in pretax operating costs and the system requires an initial investment in net working capital of $15,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project?  Security F has an expected return of 11 percent and a standard deviation of 47 percent per year. Security G has an expected return of 14 percent and a standard deviation of 63 percent per year. a. What is the expected return on a portfolio composed of 65 percent of Security F and 35 percent of Security G? b. If the correlation between the returns of Security F and Security G is. 15, what is the standard deviation of the portfolio described in part (a)?   One potential criticism of the internal rate of return technique is that there is an implicit assumption that the intermediate cash flows of the project are reinvested at the internal rate of return. In other words, if you calculate the future value of the intermediate cash flows to the end of the project at the required return, sum the future values, and calculate the internal rate of return of the two cash flows, you will get the same internal rate of return as the original calculation. If the reinvestment rate used to calculate the future value is different from the internal rate of return, the internal rate of return calculated for the two cash flows will be different. How would you evaluate this criticism?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Cori's Meats is looking at a new sausage system with an installed cost of
$304,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the
end of which the sausage system can be scrapped for $30,000. The sausage system will save the firm
$116,000 per year in pretax operating costs and the system requires an initial investment in net working
capital of $15,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of
this project?

 Security F has an expected return of 11 percent and a standard
deviation of 47 percent per year. Security G has an expected return of 14 percent and a standard
deviation of 63 percent per year.
a. What is the expected return on a portfolio composed of 65 percent of Security F and 35 percent of
Security G?
b. If the correlation between the returns of Security F and Security G is. 15, what is the standard
deviation of the portfolio described in part (a)?

 

One potential criticism of the internal rate of return technique is that there is
an implicit assumption that the intermediate cash flows of the project are reinvested at the internal rate
of return. In other words, if you calculate the future value of the intermediate cash flows to the end of the
project at the required return, sum the future values, and calculate the internal rate of return of the two
cash flows, you will get the same internal rate of return as the original calculation. If the reinvestment
rate used to calculate the future value is different from the internal rate of return, the internal rate of
return calculated for the two cash flows will be different. How would you evaluate this criticism?

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