Now assume that the equipment’s residual valuecould be as low as $0 or as high as $400,000,but $200,000 is the expected value. Because theresidual value is riskier than the other relevantcash flows, this differential risk should be incorporated into the analysis. Describe how this couldbe accomplished. (No calculations are necessary,but explain how you would modify the analysisif calculations were required.) What effect wouldthe residual value’s increased uncertainty have onLewis’s lease-versus-purchase decision?
Now assume that the equipment’s residual valuecould be as low as $0 or as high as $400,000,but $200,000 is the expected value. Because theresidual value is riskier than the other relevantcash flows, this differential risk should be incorporated into the analysis. Describe how this couldbe accomplished. (No calculations are necessary,but explain how you would modify the analysisif calculations were required.) What effect wouldthe residual value’s increased uncertainty have onLewis’s lease-versus-purchase decision?
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
Section: Chapter Questions
Problem 1PS
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Now assume that the equipment’s residual value
could be as low as $0 or as high as $400,000,
but $200,000 is the expected value. Because the
residual value is riskier than the other relevant
cash flows, this differential risk should be incorporated into the analysis. Describe how this could
be accomplished. (No calculations are necessary,
but explain how you would modify the analysis
if calculations were required.) What effect would
the residual value’s increased uncertainty have on
Lewis’s lease-versus-purchase decision?
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