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Suppose an investor is appraising an investment under the following conditions: a. Pi 0.15 Forecast NPV 30,000 20,000 15,000 10,000 1 2 0.15 3 0.50 4 0.20 Find the investment's expected value, standard deviation, and the coefficient of variation. Would the risk-averse investor prefer this investment to a risk-free investment with a NPV of $10,000? Explain. Would the risk-averse investor prefer this investment with an expected NPV of $12,000 and a standard deviation of $12,000? Explain (1i) (画

Suppose an investor is appraising an investment under the following conditions: a. Pi 0.15 Forecast NPV 30,000 20,000 15,000 10,000 1 2 0.15 3 0.50 4 0.20 Find the investment's expected value, standard deviation, and the coefficient of variation. Would the risk-averse investor prefer this investment to a risk-free investment with a NPV of $10,000? Explain. Would the risk-averse investor prefer this investment with an expected NPV of $12,000 and a standard deviation of $12,000? Explain (1i) (画

Essentials Of Investments
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
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Suppose an investor is appraising an investment under the following conditions: a. Forecast NPV Pi 0.15 30,000 20,000 15,000 10,000 1 0.15 3 0.50 4 0.20 Find the investment's expected value, standard deviation, and the coefficient of variation. Would the risk-averse investor prefer this investment to a risk-free investment with a NPV of $10,000? Explain. Would the risk-averse investor prefer this investment with an expected NPV of $12,000 and a standard deviation of $12,000? Explain (ii) (iii) evaluating two risky investments, would choosing the investment with the higher coefficient of variation imply a higher or lower degree of risk aversion? Explain your answer.
Transcribed Image Text:Suppose an investor is appraising an investment under the following conditions: a. Forecast NPV Pi 0.15 30,000 20,000 15,000 10,000 1 0.15 3 0.50 4 0.20 Find the investment's expected value, standard deviation, and the coefficient of variation. Would the risk-averse investor prefer this investment to a risk-free investment with a NPV of $10,000? Explain. Would the risk-averse investor prefer this investment with an expected NPV of $12,000 and a standard deviation of $12,000? Explain (ii) (iii) evaluating two risky investments, would choosing the investment with the higher coefficient of variation imply a higher or lower degree of risk aversion? Explain your answer.
a. return for two mutually exclusive projects to determine which project should be selected. Project A has a total life of 3 years with a discount rate of 12% and Project B has a similar total life with a discount rate of 15%. The expected cash flows of the projects are given in the table below: Suppose you work for a small farm owner and you are asked to calculate a rate of Project A -1,000 Year Project B -800 1 -2,000 -700 3,000 4,000 5,000 2 3 1,500 Would you use the IRR method or MIRR method? State why. Applying the method chosen in part (1), what is the rate of return for each project? Which project would you recommend to the owner? State why. i. ii. ii. b. A farmer is considering replacing a labor-intensive machine system with a more capital-intensive one. Adopting the new system is estimated to increase machinery operating expenses by about $21,000 per year. The new machinery will cost $30,000 plus $5,000 for shipping and installation; however, the trade-in value of the old system is $10,000. Adopting the new machinery will result in annual depreciation of 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, and 7.41% in year 4. The farmer forecasts that revenues will increase by $41,000 for each of the 4-year planning horizon, with zero salvage value and a 20% tax rate. Find the initial cash outflow and the incremental cash flows for each year. Find the real value of a $10,000 payment due in 3 years if the expected inflation C. . rate is 5% and the time preference rate is 3%. Find the real net present value. d. A cattle rancher can afford an annual debt service payment of $10,000. What is the maximum size loan that this rancher can borrow if the annual interest rate for a 10-year loan is 5%?
Transcribed Image Text:a. return for two mutually exclusive projects to determine which project should be selected. Project A has a total life of 3 years with a discount rate of 12% and Project B has a similar total life with a discount rate of 15%. The expected cash flows of the projects are given in the table below: Suppose you work for a small farm owner and you are asked to calculate a rate of Project A -1,000 Year Project B -800 1 -2,000 -700 3,000 4,000 5,000 2 3 1,500 Would you use the IRR method or MIRR method? State why. Applying the method chosen in part (1), what is the rate of return for each project? Which project would you recommend to the owner? State why. i. ii. ii. b. A farmer is considering replacing a labor-intensive machine system with a more capital-intensive one. Adopting the new system is estimated to increase machinery operating expenses by about $21,000 per year. The new machinery will cost $30,000 plus $5,000 for shipping and installation; however, the trade-in value of the old system is $10,000. Adopting the new machinery will result in annual depreciation of 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, and 7.41% in year 4. The farmer forecasts that revenues will increase by $41,000 for each of the 4-year planning horizon, with zero salvage value and a 20% tax rate. Find the initial cash outflow and the incremental cash flows for each year. Find the real value of a $10,000 payment due in 3 years if the expected inflation C. . rate is 5% and the time preference rate is 3%. Find the real net present value. d. A cattle rancher can afford an annual debt service payment of $10,000. What is the maximum size loan that this rancher can borrow if the annual interest rate for a 10-year loan is 5%?
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