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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Question
Please answer this and kindly show the solution/computation and final answers using microsoft excel. I'll give you a like. Thank you!
Transcribed Image Text:6.
A firm has a capital budget of $30,000 and is considering three possible
independent projects. Project A has a present outlay of $12,000 and
yields $4, 281 per annum for 5 years. Project B has a present outlay of
$10,000 and yields $4,184 per annum for 5 years. Project C has a present
outlay of $17,000 and yields $5,802 per annum for 10 years. Funds which
are not allocated to one of the projects can be placed in a bank deposit
where they will earn 15%.
(a) Identify six combinations of project investments and a bank deposit
which exhaust the budget.
(b) Which of the above combinations should the firm choose:
(i)
when the reinvestment rate is 15%?
when the reinvestment rate is 20%?
(ii)
Explain your answer and show your calculations (spreadsheet printout is
acceptable as long as entries are clearly labeled).
Answer:
To answer these questions it is probably best to compare future values after 10
years, bearing in mind that projects with a 5-year life will have terminal value
after 5 years which needs to compounded forward at the reinvestment rate (15%
and 20%) to year 10, and the residual deposited in the bank is always
compounded over 10 years at a 15% interest rate.
Future values are as follows:
15%
20%
$130,876
$152,092
$137,652
$158,387
A+$18,000 in bank
B+ $20,000 in bank
C+$13,000 in bank
A+B+$8,000 in bank
$170,394
$203,205
$147,161
$189,112
B+C+$3,000 in bank
$186,679
$240,224
A+C+$1,000 in bank.
$179,904
$233,929
At a reinvestment rate of 15% or 20% the combination of projects B+C would be
preferred.
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