Midterm Sample

949 Words Mar 13th, 2015 4 Pages
Chap 4:
How to calculate PV and FV for different kinds of cash flows? (apply different formulae)
Given PV or FV, can you calculate T or R?
Do you know the difference between APR and EAR?
Use monthly (daily, quarterly, annually) rate to handle monthly (daily, quarterly, annually) cash flows. Should we use APR or EAR to calculate these rates?

Q1 Peter wanted to purchase a house at price $4m. He planed to borrow 50% of the total amount through mortgage loans provided by HSBC. HSBC charged him 6% interest rate and he had to pay off the loans in 20 years. The first payment was made one month after the purchase. 10 years later, HSBC adjusted the loan rate into 12%.

What is the monthly payment during 10th year to 20th year?
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Scenario analysis – consider several scenarios (usually best scenario, base case, worst scenario; several variables may have different values in different scenarios), calculate NPV for each scenario.

Q6
A proposed investment has a cost of $5000. It will have a life of 3 years. The cost will be depreciated straight-line to a book salvage value of $2000, and will be worth $2500 at the end of the project’s economic life. Year-end sales will be $3200 per year and Year-end costs will be $200 per year. It requires an initial investment in net working capital of $500. The NWC will be recovered at the end of the project. The appropriate discount rate is 10%, and the corporate tax rate is 30%.

What is the financial breakeven (NPV breakeven) level of sales?

Q1

ans. 18,517

2m=x1/0.5%(1-1/(1+0.5%)^240, first calculate monthly payment according to the old interest rate 6%.

2m-x1/0.5%(1-1/(1+0.5%)^120=x2/1%(1-1/(1+1%)^120/(1+0.5%)^120
Left handside: pv of the amount that owe to the bank at the end of 10th year.
Right handside: pv of the monthly payment according to the new interest rate 12%.

Q2

0

Q3

a. Choose A and B.

b. Incremental IRR=A’s IRR=15%>10%. Choose B.

c. D’s IRR=C’s IRR=21%>10%. Reject D.

Q4 Ans. -320, 90, 90, 90, 194

Q5 OCF=(-10,000-20,000)*(1-30%)+20,000=-1,000 After tax salvage value=10,000-(10,000-0)*30%=7,000

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