Selection of plan.

Question

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Answer 1

Question

Chapter 10, Problem 39P

To determine

Selection of plan.

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.

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Answer 2

Question

Chapter 10, Problem 39P

To determine

Selection of plan.

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.

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Answer 3

Question

Chapter 10, Problem 39P

To determine

Selection of plan.

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.

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Answer 4

Question

Chapter 10, Problem 39P

To determine

Selection of plan.

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.

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Answer 5

Chapter 10, Problem 39P

To determine

Selection of plan.

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.

Answer 6

Chapter 10, Problem 39P

To determine

Selection of plan.

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.

Answer 7

Chapter 10, Problem 39P

To determine

Selection of plan.

Answer 8

Expert Solution & Answer

Explanation of Solution

Plan 1: Equity financing (EF) is 100%. Cost of equity financing (CI) 8.5%. Investment is $250,000. Annual revenue (AR) is $30,000. Time period (n) is 15.

Plan 2: Equity finance (EF) is 40%(1−0.6). Borrowing (BL) is 60%. Cost of borrowing (BI) is 9%.

Present worth (PW) for 100% equity financing can be calculated as follows:

PW=−CI+AR((1+MARR)n−1MARR(1+MARR)n)=−250,000+30,000((1+0.085)15−10.085(1+0.085)15)=−250,000+30,000(3.3997−10.085(3.3997))=−250,000+30,000(2.39970.289)=−250,000+30,000(8.3035)=−250,000+249,105=−895

The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.

Weighted average cost of capital (WAC) can be calculated as follows:

WAC=EF(CI)+BL(BI)=0.4(0.085)+0.6(0.09)=0.034+0.054=0.088

Weighted average cost of capital is 8.8%.

The present worth (PW) of 60% borrowing can be calculated as follows:

PW=−(CI−CI(BL))+(AR−CI(BL)(MARR(1+MARR)n(1+MARR)n−1))((1+WAC)n−1WAC(1+WAC)n)=−(250,0000−250,000(0.6))+(30,0000−250,000(0.6)(0.09(1+0.09)15(1+0.09)15−1))((1+0.088)15−10.088(1+0.088)15)=−(250,0000−150,000)+(30,0000−150,000(0.09(3.6425)(3.6425)−1))(3.5435−10.088(3.5435))=−100,000+(30,0000−150,000(0.32782.6425))(2.54350.3118)=−100,000+(30,0000−150,000(0.12405))(8.1575)=−100,000+(30,0000−18,607.5)(8.1575)=−100,000+(11,392.5)(8.1575)=−100,000+92,934.32=−7,065.68

The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.