1.value1.00 pointsProblem 12-2 Cash flow [LO2]Assume a .docx

1.
value:
1.00 points
Problem 12-2 Cash flow [LO2]
Assume a corporation has earnings before depreciation and
taxes of $123,000 depreciation of $41,000 and is in a 35 percent
tax bracket.
(a)
How much would cash flow be if there were only $21,000 in
depreciation? All other factors are the same.(Omit the "$" sign
in your response.)
Cash flow
$
(b)
How much cash flow is lost due to the reduced depreciation
between $41,000 and $21,000? (Omit the "$" sign in your
response.)
Cash flow
$
check my workeBook Linkreferen
2.
value:
1.00 points
Assume a firm has earnings before depreciation and taxes of
$650,000 and no depreciation. It is in a

40 percent tax bracket.
(a)
Compute its cash flow. (Omit the "$" sign in your response.)
Cash flow
$
(b)
Assume it has $650,000 in depreciation. Recompute its cash
flow. (Omit the "$" sign in your response.)
Cash flow
$
(c)
How large a cash flow benefit did the depreciation
provide? (Omit the "$" sign in your response.)
Benefit in cash flow
$
check my workeBook LinkView Hint #1
3.
value:
1.00 points
Assume a firm has earnings before depreciation and taxes of
$470,000 and depreciation of $170,000.
(a)
If the firm is in a 35 percent tax bracket, compute its cash
flow. (Omit the "$" sign in your response.)

Cash flow
$
(b)
If it is in a 20 percent tax bracket, compute its cash flow. (Omit
the "$" sign in your response.)
Cash flow
$
check my workeBook Linkre
4.
value:
1.00 points
Problem 12-6 Payback method [LO3]
Assume a $290,000 investment and the following cash flows for
two products:
Year
Product X
Product Y
1
$
100,000
$
90,000
2
100,000
100,000

3
75,000
80,000
4
40,000
40,000
(a)
Calculate the payback for products X and Y. (Round your
answers to 2 decimal places.)
Payback period
Product X
years
Product Y
years
(b)
Which alternative would you select under the payback method?

Product X
Product Y
5.
value:
1.00 points
Problem 12-9 Payback method [LO3]
The Short-Line Railroad is considering a $140,000 investment
in either of two companies. The cash flows are as follows:
Year
Electric Co.
Water Works
1
$
85,000
$
30,000
2
25,000
25,000
3
30,000

85,000
4 – 10
10,000
10,000
(a)
Compute the payback period for both companies. (Round your
answers to 1 decimal place.)
Payback period
Electric Co.
years
Water Works
years
(b)
Which of the investments is superior from the information
provided?
Both
Electric Co.
Water Works

6.
value:
2.00 points
Problem 12-10 Payback and net present value [LO3, 4]
Diaz Camera Company is considering two investments, both of
which cost $14,000. The cash flows are as follows:
Use Appendix B.
Year
Project A
Project B
1
$
8,000
$
7,000
2
6,000
5,000
3
4,000
9,000

(a-1)
Calculate the payback period for project A and project
B. (Round your answers to 2 decimal places.)
Payback period
Project A
years
Project B
years
(a-2)
Which of the two projects should be chosen based on the
payback method?
Project A
Project B
(b-1)
Calculate the net present value for project A and project B.
Assume a cost of capital of 8 percent.(Round "PV Factor" to 3
decimal places, intermediate and final answers to the nearest
dollar amount. Omit the "$" sign in your response.)
Net present value
Project A
$
Project B

$
(b-2)
Which of the two projects should be chosen based on the net
present value method?
Project B
Project A
(c)
Should a firm normally have more confidence in answer derived
based on Net present value method or Payback method?
Net present value method
Payback method
7.
value:
1.00 points

Problem 12-11 Internal rate of return [LO4]
You buy a new piece of equipment for $22,816, and you receive
a cash inflow of $3,100 per year for 10 years. Use Appendix D.
What is the internal rate of return? (Round "PV Factor" to 3
decimal places. Round your answer to the nearest whole
percent. Omit the "%" sign in your response.)
Internal rate of return
%
8.
value:
1.00 points
Problem 12-13 Internal rate of return [LO4]
Home Security Systems is analyzing the purchase of
manufacturing equipment that will cost $52,000. The annual
cash inflows for the next three years will be:
Year
Cash flow
1
$
26,000
2
24,000
3

19,000
(a)
Determine the internal rate of return using interpolation.
Use Appendix D. (Round "PV Factor" and intermediate to 3
decimal places. Round final answer to 2 decimal places. Omit
the "%" sign in your response.)
%
(b)
With a cost of capital of 14 percent, should the machine be
purchased?
Yes
No
9.
value:
1.00 points
Problem 12-14 Net present value method [LO4]
Altman Hydraulic Corporation will invest $156,000 in a project
that will produce the cash flow shown below. The cost of
capital is 11 percent. (Note that the third year's cash flow is
negative.)
Use Appendix B.

Year
Cash flow
1
$
52,000
2
62,000
3
(56,000)
4
55,000
5
120,000
(a)
What is the net present value of the project? (Round "PV
Factor" to 3 decimal places. Round intermediate and final
answer to the nearest dollar amount. Negative amount should be
indicated by a minus sign. Omit the "$" sign in your response.)

Net present value
$
(b)
Should the project be undertaken?
Yes
No
10.
value:
2.00 points
Problem 12-18 Net present value and internal rate of return
methods [LO4]
The Pan American Bottling Co. is considering the purchase of a
new machine that would increase the speed of bottling and save
money. The net cost of this machine is $55,000. The annual
cash flows have the following projections: Use Appendix
B and Appendix D.
Year
Cash flow
1
$ 16,000
2
21,000
3
26,000
4

11,000
5
6,000
(a)
If the cost of capital is 9 percent, what is the net present value
of selecting a new machine? (Round "PV Factor" to 3 decimal
places. Round all dollar values to the nearest dollar amount.
Omit the "$" sign in your response.)
Net present value
$
(b)
decimal places. Round all dollar values to the nearest dollar
amount. Round your answer to 2 decimal places. Omit the "%"
sign in your response.)
%
(c)
Should the project be accepted?
Yes
No

Yes
Yes
No
9.
value:
1.00 points
Problem 12-14 Net present value method [LO4]
Altman Hydraulic Corporation will invest $156,000 in a project
that will produce the cash flow shown below. The cost of
capital is 11 percent. (Note that the third year's cash flow is
negative.)
Use Appendix B.
Year
Cash flow
1
$
52,000
2
62,000

3
(56,000)
4
55,000
5
120,000
(a)
What is the net present value of the project? (Round "PV
Factor" to 3 decimal places. Round intermediate and final
answer to the nearest dollar amount. Negative amount should be
Net present value
$
(b)
Should the project be undertaken?
Yes
No

10.
value:
2.00 points
Problem 12-18 Net present value and internal rate of return
methods [LO4]
The Pan American Bottling Co. is considering the purchase of a
new machine that would increase the speed of bottling and save
money. The net cost of this machine is $55,000. The annual
cash flows have the following projections: Use Appendix
B and Appendix D.
Year
Cash flow
1
$ 16,000
2
21,000
3
26,000
4
11,000
5
6,000
(a)
If the cost of capital is 9 percent, what is the net present value
of selecting a new machine? (Round "PV Factor" to 3 decimal
places. Round all dollar values to the nearest dollar amount.
Net present value
$

(b)
decimal places. Round all dollar values to the nearest dollar
amount. Round your answer to 2 decimal places. Omit the "%"
%
(c)
Should the project be accepted?
Yes
No
11.
value:
1.00 points
Problem 12-19 Use of profitability index [LO4]
You are asked to evaluate the following two projects for the
Norton Corporation. Use a discount rate of 14 percent.
Use Appendix B.
Project X (Videotapes
of the weather report)
($20,000 investment)

Project Y (Slow-motion
replays of commercials)
Year
Cash flow
Year
Cash flow
1
$ 10,000
1
$ 20,000
2
8,000
2
13,000
3
9,000
3
14,000

4
8,600
4
16,000
(a)
Calculate the profitability index for project X. (Round "PV
Factor" to 3 decimal places. Round your "present value inflows"
to the nearest whole dollar amount. Round your final answer to
2 decimal places.)
Profitability index
(b)
Calculate the profitability index for project Y. (Round "PV
Factor" to 3 decimal places. Round your "present value inflows"
to the nearest whole dollar amount. Round your final answer to
2 decimal places.)
Profitability index
(c)
Using the net present value method, combined with the
profitability index approach, which project would you select?

Project X
Project Y
No
12.
value:
1.00 points
You received credit for this question in a previous attempt
Problem 12-20 Reinvestment rate assumption in capital
budgeting [LO4]
Turner Video will invest $66,500 in a project. The firm's cost of
capital is 12 percent. The investment will provide the following
inflows. Use Appendix A.
Year
Inflow
1
$ 19,000
2
21,000
3
25,000
4
29,000
5
33,000
(a)
If the reinvestment assumption of the net present value method
is used, what will be the total value of the inflows after five

years? (Assume the inflows come at the end of each
year.) (Round "FV Factor" to 3 decimal places, intermediate and
final answers to the nearest whole dollar amount.Omit the "$"
Total value of inflows
$
(b)
If the firm is able to earn 13 percent on reinvested funds, what
will be the total value of the inflows after five years? (Round
"FV Factor" to 3 decimal places, intermediate and final answers
to the nearest whole dollar amount.Omit the "$" sign in your
response.)
Total value of inflows
$
(c)
Which investment assumption is better?
Reinvestment assumption of IRR
Reinvestment assumption of NPV
13.
award:
0 out of
1.00 point
Problem 12-22 Capital rationing and mutually exclusive

investments [LO4]
The Suboptimal Glass Company uses a process of capital
rationing in its decision making. The firm’s cost of capital is 10
percent. It will only invest $80,600 this year. It has determined
the internal rate of return for each of the following projects.
Project
Project size
Internal rate
of return
A
$
11,400
20%
B
31,400
22
C
26,400
12
D
11,400

14
E
11,400
16
F
21,400
19
G
16,400
17
(a)
Pick out the projects that the firm should accept. (You may
select more than one answer. Click the box with a check mark
for the correct answer and click to empty the box for the wrong
answer.)
Project E

Project D
Project F
Project A
Project B
Project C
Project G
(b)
If Projects A and B are mutually exclusive, which projects
would you accept in spending $80,600? (You may select more
than one answer. Click the box with a check mark for the
correct answer and click to empty the box for the wrong
answer.)
Project E
Project A
Project F
Project C
Project B
Project D
Project G

14.
award:
1.60 out of
2.00 points
Problem 12-23 Net present value profile [LO4]
Keller Construction is considering two new investments. Project
E calls for the purchase of earth moving equipment. Project H
represents an investment in a hydraulic lift. Keller wishes to use
a net present value profile in comparing the projects. The
investment and cash flow patterns are as follows: Use Appendix
B.
Project E
Project H
Year
Cash flow
Year
Cash flow
1
$ 8,000
1
$ 19,000
2

13,000
2
16,000
3
19,000
3
15,000
4
21,000
(a)
Determine the net present value of the projects based on a zero
discount rate. (Omit the "$" sign in your response.)
Net present value
Project E
$
Project H
$
(b)
Determine the net present value of the projects based on a 13

percent discount rate. (Round "PV Factors" to 3 decimal places
and final answer to the nearest dollar amount. Omit the "$" sign
in your response.)
Net present value
Project E
$
Project H
$
(d)
If the two projects are not mutually exclusive, what would your
acceptance or rejection decision be if the cost of capital
(discount rate) is 8 percent? (Use the net present value profile
for your decision; no actual numbers are necessary.)
15.
value:
4.00 points
Problem 12-25 MACRS depreciation and cash flow [LO2]
Telstar Communications is going to purchase an asset for
$720,000 that will produce $350,000 per year for the next four
years in earnings before depreciation and taxes. The asset will
be depreciated using the three-year MACRS depreciation
schedule in Use Table 12–9. (This represents four years of
depreciation based on the half-year convention.) The firm is in a
35 percent tax bracket.
Fill in the schedule below for the next four years. (Round
"Percentage depreciation" to 3 decimal places. Round all dollar
values to the nearest whole number. Input all amounts as
positive values. Omit the "$" sign in your response.)

Earnings before depreciation and taxes
Depreciation
Earnings before taxes
Taxes
Earnings after taxes
+ Depreciation
Cash flow
16.
value:
2.00 points
You received credit for this question in a previous attempt
Problem 12-27 MACRS depreciation and net present value
[LO4]
The Summitt Petroleum Corporation will purchase an asset that
qualifies for three-year MACRS depreciation. The cost is
$390,000 and the asset will provide the following stream of
earnings before depreciation and taxes for the next four years:
Use Table 12-9.
rev:4_5_2013_QC_29129
Year 1
$
206,000
Year 2
254,000

Year 3
86,000
Year 4
78,000
The firm is in a 40 percent tax bracket and has an 12 percent
cost of capital. Use Appendix B
(a)
Calculate the net present value. (Round "PV Factor" to 3
decimal places, intermediate calculations and final answer to
the nearest whole dollar amount. Omit the "$" sign in your
response.)
Net present value
$
(b)
Under the net present value method, should Summit Petroleum
Corporation purchase the asset?
Yes
No
17.
value:
1.00 points
You did not receive credit for this question in a previous
attempt

Problem 12-30 Working capital requirements in capital
budgeting [LO4]
The Bagwell Company has a proposed contract with the First
Military Base Facility of Texas. The initial investment in land
and equipment will be $185,000. Of this amount, $160,000 is
subject to five-year MACRS depreciation. The balance is in
nondepreciable property (land). The contract covers a 6 year
period. At the end of 6 years the nondepreciable assets will be
sold for $39,000. The depreciated assets will have zero resale
value. Use Table 12-9 and Appendix B.
The contract will require an additional investment of $49,000 in
working capital at the beginning of the first year and, of this
amount, $29,000 will be returned to the Bagwell Company after
six years.
The investment will produce $61,000 in income before
depreciation and taxes for each of the six years. The corporation
is in a 40 percent tax bracket and has a 6 percent cost of capital.
(a)
Calculate the net present value. (Round "Percentage
depreciation" and "PV Factor" to 3 decimal places. Round all
dollar values to the nearest whole number. Omit the "$" sign in
your response.)
Net present value
$
(b)
Should the investment be undertaken?

Yes
No
18.
value:
2.00 points
Problem 12-31 Tax losses and gains in capital budgeting [LO2]
An asset was purchased three years ago for $195,000. It falls
into the five-year category for MACRS depreciation. The firm is
in a 30 percent tax bracket. Use Table 12–9.
(a)
Compute the tax loss on the sale and the related tax benefit if
the asset is sold now for $22,560.(Round "Percentage
depreciation" to 3 decimal places. Input all amounts as positive
values. Omit the "$" sign in your response.)
Tax loss on the sale
$
Tax benefit
$
(b)
Compute the gain and related tax on the sale if the asset is sold
now for $71,060. (Round "Percentage depreciation" to 3

decimal places. Input all amounts as positive values. Omit the
"$" sign in your response.)
Taxable gain
$
Tax obligation
$
19.
award:
2.15 out of
3.00 points
Problem 12-32 Capital budgeting with cost of capital
computation [LO5]
DataPoint Engineering is considering the purchase of a new
piece of equipment for $390,000. It has an eight-year midpoint
of its asset depreciation range (ADR). It will require an
additional initial investment of $210,000 in nondepreciable
working capital. Seventy two thousand five hundred dollars of
this investment will be recovered after the sixth year and will
provide additional cash flow for that year. Income before
depreciation and taxes for the next six years will be: Use Table
12–9 and Appendix B.
Year
Amount
1
$
230,000

2
190,000
3
160,000
4
145,000
5
110,000
6
100,000

The tax rate is 40 percent. The cost of capital must be computed
based on the following:
Cost
(aftertax)
Weights
Debt
Kd
9.20
%
20
%
Preferred stock
Kp
13.80
10
Common equity
(retained earnings)
Ke
18.00
70

(a)
Determine the annual depreciation schedule. (Round
"Percentage depreciation" to3 decimal places.Round all dollar
values to the nearest whole number. Omit the "$" sign in your
response.)
Year
Depreciation
base
Percentage
depreciation
Annual
depreciation
1
2
3
4

5
6
(b)
Determine annual cash flow. Include recovered working capital
in the sixth year. (Round all dollar values to the nearest whole
number. Omit the "$" sign in your response.)
Year
Cash flow
1
$
2
3

4
5
6
(c)
Determine the weighted average cost of capital. (Round your
intermediate calculations and final answer to 2 decimal places.
Omit the "%" sign in your response.)
Weighted average cost of capital
%
(d)
Determine the net present value. (Round "PV Factor" to 3
decimal places. Round your intermediate and final answer to the
nearest whole number. Negative amount should be indicated by
a minus sign. Omit the "$" sign in your response.)
Net present value
$
(e)
Should DataPoint purchase the new equipment?
20.
value:
5.00 points
Problem 12-33 Replacement decision analysis [LO4]

Hercules Exercising Equipment Co. purchased a computerized
measuring device two years ago for $86,000. The equipment
falls into the five-year category for MACRS depreciation and
can currently be sold for $38,800.
A new piece of equipment will cost $270,000. It also falls
into the five-year category for MACRS depreciation.
Assume the new equipment would provide the following
stream of added cost savings for the next six years. Use Table
12–9 and Appendix B.
Year
Cash flow
1
$65,000
2
55,000
3
53,000
4
51,000
5
48,000
6
37,000
The firm’s tax rate is 30 percent and the cost of capital is 11
percent.
(a)
What is the book value of the old equipment? (Round
"Percentage depreciation" to 3 decimal places. Omit the "$"

Book value
$
(b)
What is the tax loss on the sale of the old equipment? (Omit the
"$" sign in your response.)
Tax loss
$
(c)
What is the tax benefit from the sale? (Omit the "$" sign in your
response.)
Tax benefit
$
(d)
What is the cash inflow from the sale of the old
equipment? (Omit the "$" sign in your response.)
Cash inflow
$
(e)
What is the net cost of the new equipment? (Include the inflow
from the sale of the old equipment.)(Omit the "$" sign in your
response.)
Net cost
$
(f)
Determine the depreciation schedule for the new
equipment. (Round "Percentage depreciation" to 3 decimal

places. Omit the "$" sign in your response.)
Year
Depreciation
base
Percentage
depreciation
Annual
depreciation
1
$
$
2
3
4
5
6

$
(g)
Determine the depreciation schedule for the remaining years of
the old equipment. (Round "Percentage depreciation" to 3
decimal places. Omit the "$" sign in your response.)
Year
Depreciation
base
Percentage
depreciation
Annual
depreciation
1
$
$
2
3

4
(h)
Determine the incremental depreciation between the old and
new equipment and the related tax shield benefits. (Round all
dollar values to the nearest whole number. Round "Tax rate" to
2 decimal places. Omit the "$" sign in your response.)
Year
Depreciation
on new
equipment
Depreciation
on old
equipment
Incremental
depreciation
Tax rate
Tax shield
benefits
1
$
$
$
$
2

3
4
5
6
(i)
Compute the aftertax benefits of the cost savings. (Round "Tax
rate" to 2 decimal places. Omit the "$" sign in your response.)
Year
Savings
(1 − Tax rate)
After tax
savings
1

$65,000
$
2
55,000
3
53,000
4
51,000
5
48,000
6
37,000
(j)
Add the depreciation tax shield benefits and the aftertax cost
savings, and determine the present value.(Round "PV Factor" to
3 decimal places. Round your intermediate and final answers to
the nearest whole dollar amount. Omit the "$" sign in your
response.)
Year
Tax shield
benefits from
depreciation

After tax
cost savings
Total annual
benefits
Present value
factor
Present value
1
$
$
$
2
3
4
5

6
$
(k)
Compare the present value of the incremental benefits (j) to the
net cost of the new equipment (e).(Negative amount should be
Net present value
$

(l)
Should the replacement be undertaken?
No
Yes
21.
value:
1.00 points
Problem 13-1 Risk-averse [LO2]
Assume you are risk-averse and have the following three
choices.
Projects
Expected
value
Standard
deviation
A
$
2,010
$
1,700
B
2,420
2,260

C
2,180
1,340
(a)
Compute the coefficient of variation for each. (Round your
answers to 2 decimal places.)
Projects
Coefficient of variation
A
B
C
(b)
Which project will you select?
Project A
Project B
Project C
22.

value:
1.00 points
Problem 13-2 Expected value and standard deviation [LO1]
Lowe Technology Corp. is evaluating the introduction of a new
product. The possible levels of unit sales and the probabilities
of their occurrence are given.
Possible
market reaction
Sales in
units
Probabilities
Low response
20
.30
Moderate response
35
.20
High response
45
.20
Very high response
60

.30
(a)
What is the expected value of unit sales for the new
product? (Round your answer to 2 decimal places.)
Expected value
(b)
What is the standard deviation of unit sales? (Round your
final answer to 2 decimal places.)
Standard deviation
23.
award:
0 out of
1.00 point
Problem 13-4 Coefficient of variation [LO1]
Shack Homebuilders, Limited, is evaluating a new promotional
campaign that could increase home sales. Possible outcomes and
probabilities of the outcomes are shown below.
Possible outcomes
Additional
sales in units
Probabilities
Ineffective campaign

20
.40
Normal response
110
.40
Extremely effective
140
.20
Compute the coefficient of variation. (Round your answer to 3
decimal places.)
24.
value:
2.00 points
Problem 13-7 Coefficient of variation [LO1]
Five investment alternatives have the following returns and
standard deviations of returns.

Alternatives
Returns: Expected value
Standard
deviation
A
$
1,280
$
1,150
B
1,790
1,490
C
12,300
2,200
D
1,310
1,350
E
65,400

19,400
Calculate the coefficient of variation and rank the five
alternatives from lowest risk to the highest risk by using the
coefficient of variation. (Round your answers to 2 decimal
places.)
Alternatives
Coefficient of
variation
Rank
A
B
C
D
E
25.
value:
1.00 points
attempt
Problem 13-10 Coefficient of variation and time [LO1]

Sensor Technology wishes to determine its coefficient of
variation as a company over time. The firm projects the
following data (in millions of dollars):
Year
Profits:
Expected value
Standard
deviation
1
$
93
$
34
3
157
65
6
206
98
9
226
120

(a)
Compute the coefficient of variation (V) for each time
period. (Round your answers to 2 decimal places.)
Year
Coefficient of
variation
1
3
6
9
(b)
Does the risk (V) appear to be increasing over a period of time?
Yes
No
26.
value:
2.00 points
Tim Trepid is highly risk-averse while Mike Macho actually
enjoys taking a risk.

Investments
Returns:
Expected value
Standard
deviation
Buy stocks
$
9,010
$
6,470
Buy bonds
7,030
2,460
Buy commodity futures
26,800
23,900
Buy options
21,200
21,500
(a-1)

Compute the coefficients of variation. (Round your answers to 3
decimal places.)
Coefficient of
variation
Buy stocks
Buy bonds
Buy options
(a-2)
Which one of the following four investments should Tim
choose?
Buy bonds
Buy stocks
Buy options
(b)
Which one of the four investments should Mike choose?

Buy bonds
Buy stocks
Buy options
27.
value:
1.00 points
attempt
Problem 13-13 Coefficient of variation and investment decision
[LO1]
Kyle's Shoe Stores, Inc., is considering opening an additional
suburban outlet. An aftertax expected cash flow of $100 per
week is anticipated from two stores that are being evaluated.
Both stores have positive net present values.
Site A
Probability
Cash flows
.20
50

.40
100
.25
110
.15
150
Site B
Probability
Cash flows
.10
20

.20
50
.40
100
.20
150
.10
180
(a)
Compute the coefficient of variation for each site. (Do not
round intermediate calculations. Round your answers to 4
decimal places.)
Coefficient of

variation
Site A
Site B
(b)
Which store site would you select based on the distribution of
these cash flows? Use the coefficient of variation as your
measure of risk.
Site A
Site B
28.
value:
1.00 points
Problem 13-14 Risk-adjusted discount rate [LO3]
Micro Systems is evaluating a $59,100 project with the
following cash flows.
Years
Cash flows
1
$
9,180
2
13,100

3
21,700
4
19,400
5
25,600
The coefficient of variation for the project is .654.
Discount rate
0
−
.25
7
%
.26
−
.50
11
.51
−
.75
15

.76
−
1.00
17
1.01
−
1.25
20
(a-1)
Select the appropriate discount rate.
7%
11%
15%
17%
20%
(a-2)
Compute the net present value. Use Appendix B.(Round "PV
Factor" to 3 decimal places, intermediate and final answers to
the nearest dollar amount. Negative amount should be indicated

by a minus sign. Omit the "$" sign in your response.)
Net present value
$
(b)
Based on the net present value should the project be
undertaken?
No
Yes
29.
value:
1.00 points
Problem 13-16 Discount rate and timing [LO1]
(a)
Fill in the table below from Appendix B. (Round your answers
to 3 decimal places.)
Discount rate
Years
10%
18%
1

10
20
(b)
What is the impact of a high discount rate on long-term
inflows?
Greater on long-term value
Lesser on long-term value
30.
value:
1.00 points
Problem 13-17 Expected value with net present value [LO1]
Debby’s Dance Studios is considering the purchase of new
sound equipment that will enhance the popularity of its aerobics
dancing. The equipment will cost $22,400. Debby is not sure

how many members the new equipment will attract, but she
estimates that her increased annual cash flows for each of the
next five years will have the following probability distribution.
Debby’s cost of capital is 12 percent.
Cash flow
Probability
$
3,890
.3
5,330
.2
8,390
.2
9,880
.3
(a)
What is the expected value of the cash flow? (Omit the "$" sign
in your response.)

Expected cash flow
$
(b)
What is the expected net present value? Use Appendix
D. (Round "PV Factor" to 3 decimal places, intermediate and
final answers to the nearest dollar amount. Negative amount
should be indicated by a minus sign. Omit the "$" sign in your
response.)
Net present value
$
(c)
Should Debby buy the new equipment?
Yes
No
31.
value:
1.00 points
attempt
Problem 13-18 Deferred cash flows and risk-adjusted discount
rate [LO3]
Highland Mining and Minerals Co. is considering the purchase
of two gold mines. Only one investment will be made. The
Australian gold mine will cost $1,630,000 and will produce
$306,000 per year in years 5 through 15 and $572,000 per year
in years 16 through 25. The U.S. gold mine will cost $2,012,000

and will produce $270,000 per year for the next 25 years. The
cost of capital is 10 percent.
(a-1)
Calculate the net present value for each project. (Round "PV
Factor" to 3 decimal places, intermediate and final answers to
the nearest dollar amount. Omit the "$" sign in your response.)
Net present value
The Australian Mine
$
The U.S. Mine
$
(a-2)
Which investment should be made?
Australian Mine
U.S. Mine
(b-1)
If the Australian Mine justifies an extra 1 percent premium over
the normal cost of capital because of its riskiness and
the relative uncertainty of cash flows, recalculate the net
present value of the mine.(Round "PV Factor" to 3 decimal
places, intermediate and final answers to the nearest dollar
amount. Negative amount should be indicated by a minus sign.

Net present value
The Australian Mine
$
(b-2)
Does the investment decision change?
Yes
No
32.
value:
2.00 points
attempt
Problem 13-20 Risk-adjusted discount rate [LO3]
Mr. Sam Golff desires to invest a portion of his assets in rental
property. He has narrowed his choices down to two apartment
complexes, Palmer Heights and Crenshaw Village. After
conferring with the present owners, Mr. Golff has developed the
following estimates of the cash flows for these properties.
Palmer Heights
Yearly aftertax
cash inflow
(in thousands)
Probability

$ 90
.2
95
.2
110
.2
125
.2
130
.2

Crenshaw Village
Yearly aftertax
cash inflow
(in thousands)
Probability
$ 95
.2
100
.3
110
.4
120
.1

Mr. Golff is likely to hold the complex of his choice for 30
years, and he will use this time period for decision-making
purposes. Either apartment complex can be acquired for
$206,000. Mr. Golff uses a risk-adjusted discount rate when
considering investments. His scale is related to the coefficient
of variation.
Discount rate
0
–
0.20
5
%
0.21
–
0.40
8
(cost of capital)
0.41
–
0.60
12
Over 0.60
16

(a)
Compute the risk-adjusted net present values for Palmer Heights
and Crenshaw Village. (Omit the "$" sign in your response.)
Net present value
Palmer Heights
$
Crenshaw Village
$
(b-1)
Which investment should Mr. Golff accept if the two
investments are mutually exclusive?
Crenshaw Village
Palmer Heights
Both
None
(b-2)
Which investment should Mr. Golff accept If the investments
are not mutually exclusive and no capital rationing is involved?

Palmer Heights
Crenshaw Village
Both
None
33.
value:
1.00 points
Problem 13-21 Decision-tree analysis [LO4]
Allison’s Dresswear Manufacturers is preparing a strategy for
the fall season. One alternative is to expand its traditional
ensemble of wool sweaters. A second option would be to enter
the cashmere sweater market with a new line of high-quality
designer label products. The marketing department has
determined that the wool and cashmere sweater lines offer the
following probability of outcomes and related cash flows.
EXPAND WOOL SWEATERS LINE
ENTER CASHMERE SWEATERS LINE
Expected sales
Probability
Present value
of cash flows
from sales
Probability
Present value
of cash flows
from sales

Fantastic
.3
$
262,000
.3
$
378,000
Moderate
.3
194,000
.3
239,000
Low
.4
88,100

.4
0
The initial cost to expand the wool sweater line is $161,000. To
enter the cashmere sweater line the initial cost in designs,
inventory, and equipment is $136,000.
(a)
Calculate Net present value. (Negative amounts should be
Net present value
Expand wool sweaters line
$
Enter cashmere sweaters line
$
34.
value:
1.00 points
attempt
Problem 13-22 Probability analysis with a normal curve
distribution [LO4]
When returns from a project can be assumed to be normally
distributed (represented by a symmetrical, bell-shaped curve),
the areas under the curve can be determined from statistical
tables based on standard deviations. For example, 68.26 percent
of the distribution will fall within one standard deviation of the
expected value ( ± 1σ). Similarly 95.44 percent will fall

within two standard deviations ( ± 2σ), and so on. An
abbreviated table of areas under the normal curve is shown here.
Number of σ's
from expected
value
+ or –
+ and –
.50
.1915
.3830
1.00
.3413
.6826
1.50
.4332
.8664
1.75
.4599

.9198
2.00
.4772
.9544
Assume Project A has an expected value of $34,000 and a
standard deviation ( σ ) of $6,800.
(a)
What is the probability that the outcome will be between
$23,800 and $44,200? (Round your answer to 4 decimal places.)
Probability
(b)
What is the probability that the outcome will be between
$20,400 and $47,600? (Round your answer to 4 decimal places.)
Probability
(c)
What is the probability that the outcome will be at least
$20,400? (Round your answer to 4 decimal places.)
Probability
(d)

What is the probability that the outcome will be less than
$45,920? (Round your answer to 4 decimal places.)
Probability
(e)
What is the probability that the outcome will be less than
$30,600 or greater than $40,800? (Round your answer to 4
decimal places.)
Probability
35.
value:
1.00 points
attempt
Problem 13-23 Increasing risk over time [LO1]
The Oklahoma Pipeline Company projects the following pattern
of inflows from an investment. The inflows are spread over time
to reflect delayed benefits. Each year is independent of the
others.
Year 1
Year 5
Year 10
Cash inflow

Probability
Cash inflow
Probability
Cash inflow
Probability
35
.40
20
.35
50
.40
60
.20
60

.30
60
.40
85
.40
100
.35
110
.20
The expected value for all three years is $60.
(a)

Compute the standard deviation for each of the three
years. (Round your answers to 2 decimal places.)
Standard deviation
Year 1
Year 5
Year 10
36.
value:
1.00 points
Problem 13-24 Portfolio effect of a merger [LO5]
Treynor Pie Co. is a food company specializing in high-calorie
snack foods. It is seeking to diversify its food business and
lower its risks. It is examining three companies—a gourmet
restaurant chain, a baby food company, and a nutritional
products firm. Each of these companies can be bought at the
same multiple of earnings. The following represents information
about the companies.
Company
Correlation with
Treynor Pie
company
Sales
($ millions)
Expected earnings($ millions)
Standard deviation
in earnings
($ millions)
Treynor Pie Company

+
1.0
$
182
$
9
$
3.0
Gourmet restaurant
+
.5
63
9
1.2
Baby food company
+
.3
54
6

1.7
Nutritional products company
−
-.6
75
7
3.8
(a-1)
Compute the coefficient of variation for each of the four
companies. (Round your answers to 2 decimal places.)
Coefficient of
variation
Treynor Pie Company
Gourmet restaurant
Baby food company
(a-2)
Which company is the least risky?

Gourmet restaurant
Baby food company
Treynor Pie Company
(a-3)
Which company is the most risky?
Baby food company
Gourmet restaurant
Treynor Pie Company
(b)
Which of the acquisition candidates is most likely to reduce
Treynor Pie Company's risk?

Gourmet restaurant
Baby food company
37.
value:
1.00 points
attempt
Problem 13-25 Portfolio effect of a merger [LO5]
Transoceanic Airlines is examining a resort motel chain to add
to its operation. Prior to the acquisition, the normal expected
outcomes for the firm are as follows:
Outcomes
($ millions)
Probability
Recession
$
35
.40
Normal economy
55
.20
Strong economy

75
.40
(a)
Compute the expected value, standard deviation, and coefficient
of variation. (Enter your answer in millions.Round Standard
deviation to 2 decimal places and final answer to 3 decimal
places.Omit the "$" sign in your response.)
Expected value
$
Standard deviation
$
38.
value:
1.00 points
attempt
Problem 13-27 Certainty equivalent approach [LO1]
Sheila Goodman recently received her MBA from the Harvard
Business School. She has joined the family business, Goodman
Software Products, Inc., as vice president of finance.
She believes in adjusting projects for risk. Her father is
somewhat skeptical but agrees to go along with her. Her
approach is somewhat different than the risk-adjusted discount

rate approach, but achieves the same objective.
She suggests that the inflows for each year of a project be
adjusted downward for lack of certainty and then be discounted
back at a risk-free rate. The theory is that the adjustment
penalty makes the inflows the equivalent of riskless inflows,
and therefore a risk-free rate is justified.
A table showing the possible coefficient of variation for an
inflow and the associated adjustment factor is shown below:
Coefficient of
variation
Adjustment
factor
0
–
.25
.90
.26
–
.50
.80
.51
–
.75
.70
.76
–
1.00
.60

1.01
–
1.25
.50
Assume a $180,000 project provides the following inflows
with the associated coefficients of variation for each year.
Year
Inflow
1
$
31,800
.15
2
53,200
.23
3
77,000
.52

4
59,100
.71
5
66,100
1.10
(a)
Fill in the table below (Round "Adjustment factor" to 2 decimal
places. Omit the "$" sign in your response):
Year
Adjustment factor
Adjusted Inflow
1
$
2
3
4
5

(b-1)
If the risk-free rate is 5 percent, compute the net present value
of the adjusted inflows. Use Appendix B. (Round "PV Factor"
to 3 decimal places, intermediate and final answers to the
nearest whole dollar amount. Negative amount should be
Net present value
$
(b-2)
Should this project be accepted?
No
Yes
(Click to select)
(Click to select)
(Click to select)
(Click to select)

.8664
.9544
.9772
.8770
0.617
0
0.
0.

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