Chapter 6 Questions

Sample Answer

Question 3

Question 3
a	Initial investment	Per year cost	Period	Opportunity Cost	NPV	EAC
	$ (12,000.00)	$ (5,000.00)	Infinite	10%	$ (17,000.00)	$ (1,700.00)

b	Initial investment	Per year cost	Period	Opportunity Cost	NPV	EAC
	$ (5,000.00)	$ (1,000.00)	20 years	10%	($1,363.64)	$ (136.36)

c	Initial investment	Per year cost	Period	Opportunity Cost	NPV	EAC
	$ (3,500.00)	$ (1,200.00)	15 years	10%	($4,272.73)	$ (427.27)

Question 4

Question 4
Option A
Cost of wooden sliding	$ 5,000.00
Maintenance cost	$ 1,000.00
Useful life	10 years
Annuity factor @ 10%	6.1442

Equivalent Annual Cost	Cost of sliding/ Annuity Factor + Maintainance Cost
	Cost of sliding	Annuity Factor	Maintaince Cost	Ecquivalent Annual Cost
	$ 5,000.00	6.1442	$ 1,000.00	$ 1,813.78
Option B
Cost of Aluminum siding	$ 15,000.00
Useful life	Infinity
Annuity Factor @ 10%	0
Maintenance Cost	x(say)
Equivalent Annual cost	$ 1,500.00
	Cost of aluminum siding	Annuity Factor @10%	Maintaince Cost	Ecquivalent Annual Cost
	$ 1,500.00	0	x	#DIV/0!
Answer	The maintenance costs should not exceed $1812.776

Question 6

Question 6
a	Investment in new distribution system	Additional working capital	Initial investement for the project
	$ 10,000,000.00	$ 1,000,000.00	$ 11,000,000.00

b	calculation of annual operating cashflow from this project
	Additional sales	$ 10.00
	Less variable cost	$ (4.00)
	Contribution Margin	$ 6.00
4	Less fixed costs
	less additional advertising	$ (1.00)
	Depreciation( &10 million /10 years)	$ (1.00)
	Annual operating income	$ 4.00
	Less tax @ 40%	$ 1.60
	Net Income	$ 2.40
	Add Depreciation	$ 1.00
	Annual operating cashflow	$ 3.40

c	NPV of the project in millions
	Year	$ –	1	2	3	4	5	6	7	8	9	10
	Investment in new distribution system	$ (10.00)
	Operating cashflow		$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40
	Additional working capital	$ 1.00
	Net Cashflow	#NAME?	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40	$ 3.40
	Discount factor @8%	$ 1.00	$0.93	$ 0.86	$ 0.79	$ 0.74	$ 0.68	$ 0.63	$ 0.58	$ 0.54	$ 0.50	$ 0.46
	Present value	$ (11.00)	$ 3.16	$ 2.92	$ 2.69	$ 2.52	$ 2.31	$ 2.14	$ 1.97	$ 1.84	$ 1.70	$ 1.56
	NPV –											$ 11.81

References

Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.

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Question

Week 5 Chapter 6 Questions

Select three formula-driven-problems from the Chapter 6 that you wish to showcase and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.

Chapter 6 Questions

REMINDER: Part of the grade that you receive on your problems is the utilization of Formulas. Therefore, do not pick problems that only require a narrative!

Textbook:

Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.

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