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
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![($ millions)
Year 1
Year 0
110
Year 2
Years 3–10
Investment
Production (millions of pounds per year)
Spread ($ per pound)
Net revenues
52
92
1.07
1.07
1.07
1.07
55.64
98.44
Production costs
42.00
42.00
Transport
Other costs
32
32
32
Cash flow
-110
32
-18.36
-24.44
NPV (at r= 10%) = 0
Assume the dividend payout ratio each year is 100%.
a. Calculate the year-by-year book and economic profitability for investment in polyzone production. Assume straight-line depreciation over 10 years and a cost of capital of 10%. (Negative
answers should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your income
answers in millions rounded to 2 decimal places and enter the rate of return as a percent rounded to 2 decimal places.)
Period:
1
2
4
Book income ($)
Book rate of return (%)
Economic income ($)
7
8
9.
10
Book income ($)
Book rate of return (%)
Economic income ($)
b-1. What is the economic rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Economic rate of return
%
b-2. Now compute the steady-state book rate of return (ROI) for a mature company producing polyzone. (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
ROI
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F889b55a3-4b0d-4f2a-8b5e-b4e693e967b2%2F300138d9-a8bf-4cca-94e5-5126a1aa3ec6%2Fntsps1h_processed.png&w=3840&q=75)
Transcribed Image Text:($ millions)
Year 1
Year 0
110
Year 2
Years 3–10
Investment
Production (millions of pounds per year)
Spread ($ per pound)
Net revenues
52
92
1.07
1.07
1.07
1.07
55.64
98.44
Production costs
42.00
42.00
Transport
Other costs
32
32
32
Cash flow
-110
32
-18.36
-24.44
NPV (at r= 10%) = 0
Assume the dividend payout ratio each year is 100%.
a. Calculate the year-by-year book and economic profitability for investment in polyzone production. Assume straight-line depreciation over 10 years and a cost of capital of 10%. (Negative
answers should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your income
answers in millions rounded to 2 decimal places and enter the rate of return as a percent rounded to 2 decimal places.)
Period:
1
2
4
Book income ($)
Book rate of return (%)
Economic income ($)
7
8
9.
10
Book income ($)
Book rate of return (%)
Economic income ($)
b-1. What is the economic rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Economic rate of return
%
b-2. Now compute the steady-state book rate of return (ROI) for a mature company producing polyzone. (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
ROI
%
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