Case Study 2 (1,5 mark) Electronics Communications Technology Investment Development Corporation (ELC), Part II Electronics Communications Technology Investment Development Ltd., Co., Elcom’s forerunner, was set up in 1995. In 2003, the Company operated in the form of JSC with an initial charter capital of VND10 billion. The Company’s current charter capital is VND211.25 billion. Elcom now is provider of software and system products for network providers. The Company’s operations focus on commercial agents; producing software and integrating software. In addition, the Company has some real estate and mineral exploiting projects. The Company is now the first unit in Vietnam as well as in the world which successfully studies the application of E-meeting system solution with MPEG and 3G technologies. Its competitors are Huawei, ZTE ( China), NEO, FPT, Siseo (US). The chairman of Board of Directors is Phan Chien Thang and Đang Thi Thanh Minh has been hired by the company as a chief accountant. One of the major revenue-producing items manufactured by ELC is Call Accounting System (CAS) for prepayment subscribers IN/Convergent billing of Vietnam mobile and Gtel, and 90% share market of Vinaphone. ELC has one CAS model on the market, and sales has been excellent. Products of the sector must be continuously updated to avoid being backward; however, telecommunication infrastructure in Vietnam is not synchronous, causing difficulties for the development of the Company. Furthermore, as with any electronic item, technology changes rapidly, together with the number of mobile phone subscribers saturated is an obstacle for the growth of telecommunication sector in the future. Therefore, the current CAS has limited features in comparison with newer models. ELC spent $750,000 to develop a prototype for a new CAS that has all features of the existing CAS but adds more new features. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new CAS. ELC can manufacture the new CAS for $150 each in variable costs. Fixed costs for the operation are estimated to run $4.5 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next 5 years, respectively. The unit price of the new CAS will be $340. The nexceesary equipment can be purchased for $16.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of equipment in 5 years will be $3.5 million. As previously stated, ELC currently manufactures a CAS. Production of the existing model is expected to be terminated in two years. If ELC does not introduce the new CAS, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing CAS is $280 per unit, with variable costs of $120 each and fixed costs of $1,800,000 per year. If ELC does introduce the new CAS, sales of the existing CAS will fall by 15,000 units per year, and the pr ...

1. Case Study 2 (1,5 mark)
Electronics Communications Technology Investment
Development Corporation (ELC), Part II
Electronics Communications Technology Investment
Development Ltd., Co., Elcom’s forerunner, was set up in 1995.
In 2003, the Company operated in the form of JSC with an
initial charter capital of VND10 billion. The Company’s current
charter capital is VND211.25 billion. Elcom now is provider of
software and system products for network providers. The
Company’s operations focus on commercial agents; producing
software and integrating software. In addition, the Company has
some real estate and mineral exploiting projects. The Company
is now the first unit in Vietnam as well as in the world which
successfully studies the application of E-meeting system
solution with MPEG and 3G technologies. Its competitors are
Huawei, ZTE ( China), NEO, FPT, Siseo (US).
The chairman of Board of Directors is Phan Chien Thang and
Đang Thi Thanh Minh has been hired by the company as a chief
accountant. One of the major revenue-producing items
manufactured by ELC is Call Accounting System (CAS) for
prepayment subscribers IN/Convergent billing of Vietnam
mobile and Gtel, and 90% share market of Vinaphone. ELC has
one CAS model on the market, and sales has been excellent.
Products of the sector must be continuously updated to avoid
being backward; however, telecommunication infrastructure in
Vietnam is not synchronous, causing difficulties for the
development of the Company. Furthermore, as with any
electronic item, technology changes rapidly, together with the
number of mobile phone subscribers saturated is an obstacle for
the growth of telecommunication sector in the future. Therefore,
the current CAS has limited features in comparison with newer
models.
ELC spent $750,000 to develop a prototype for a new CAS that
has all features of the existing CAS but adds more new features.
The company has spent a further $200,000 for a marketing study

2. to determine the expected sales figures for the new CAS.
ELC can manufacture the new CAS for $150 each in variable
costs. Fixed costs for the operation are estimated to run $4.5
million per year. The estimated sales volume is 70,000, 80,000,
100,000, 85,000, and 75,000 per each year for the next 5 years,
respectively. The unit price of the new CAS will be $340. The
nexceesary equipment can be purchased for $16.5 million and
will be depreciated on a seven-year MACRS schedule. It is
believed the value of equipment in 5 years will be $3.5 million.
As previously stated, ELC currently manufactures a CAS.
Production of the existing model is expected to be terminated in
two years. If ELC does not introduce the new CAS, sales will be
80,000 units and 60,000 units for the next two years,
respectively. The price of the existing CAS is $280 per unit,
with variable costs of $120 each and fixed costs of $1,800,000
per year. If ELC does introduce the new CAS, sales of the
existing CAS will fall by 15,000 units per year, and the price of
the existing units will have to be lowered to $240 each. Net
working capital for the CASs will be 20% of sales and will
ocurr with the timing of cash flows for the year; for example,
there is no initial layout for NWC, but changes in NWC will
first occur in year 1 with the first year’s sales. ELC has a 35%
corporate tax rate and a 12% required return.
Mrs. Thang asked Ms. Minh to prepare a report that answers the
following questions:
1. What is the profitability index of the project?
2. What is the IRR of the project?
3. What is the NPV of the project?Case Study 3 (1,5 mark)
Electronics Communications Technology Investment
Development Corporation (ELC), Part II
Mrs. Thang, the president of ELC, had received the capital
budgeting analysis from Ms. Minh for the new CAS the

3. company is considering. Mrs. Minh was pleased with the
results, but he still had concerns about the new CAS. ELC had
used a small market research firm for the past 20 years. Because
of rapid changes in technology, he was concerned that a
competitor could enter the market. This would likely force ELC
to lower the sales price of its new CAS. For this reason, he has
asked Minh to analyze how changes in the price of the new CAS
and changes in the quantity sold will affect the NPV of the
project.
Thang has asked Minh to prepare a memo answering the
following questions:
1. How sensitive is the NPV to changes in the price of the new
CAS?
2. How sensitive is the NPV to changes in the quantity sold of
the new CAS?
Question 5: Arbitrage Pricing Theory (1,5 marks)
Assume that the returns of individual securities are generated by
the following two-factor model:
Rit = E(Rit) + βi1F1t + βi2F2t
Here:
Rit is the return for security i at time t
F1t and F2t are market factors with zero expectation and zero
covariance
In addition, assume that there is a capital market for 4
securities, and the capital market for these four assets is perfect
in the sense that there are no transaction costs and short sales
(i.e., negative positions) are permitted. The characteristics of
the four securities follow:
Security
β1

4. β2
E(R)
1
1.0
1.5
20%
2
0.5
2.0
20
3
1.0
0.5
10
4
1.5
0.75
10
a) Construct a portfolio containing (long or short) securities 1
and 2, with a return that does not depend on the market factor,
F1t, in any way. (Hint: such a portfolio will have β1=0).
Compute the expected return and β2 coefficient for this
portfolio.
b) Following the procedure in (a), construct a portfolio
containing securities 3 and 4 with a return that does not depend
on the market factor the F1t. Compute the expected return and
β2 coefficient for this portfolio.
c) There is a risk-free asset with expected retrun equal to 4.9%,
β1 = 0, and β2 = 0. Describe a possible arbitrage opportunity in
such detail that an investor could implement it.
d) What effect would the existence of these kinds of arbitrage
opportunities have on the capital markets for these securities in
the short and long run? Graph your analysis.

5. Q1.You are a buyer for a battery company and are investigating
the purchase of lithium from an African company for $100 per
barrel and $14 per barrel to process and package it before
shipping. This particular source requires an 15 month lead time
with material and packaging costs paid up front (at time order is
placed). Transportation is $4 per barrel and paid when received.
If the risk free annual interest rate is 10%, what is the value
per barrel after received in the U.S.? If it is received 3 months
late, how much is invested per barrel when it is received?
Assume monthly compounding.
Q2.James had a rich uncle who left her a trust fund of $200,000
that earn interest at an effective annual rate of 5%
A. If she receives $23,000 annually until the funds are gone,
how many payments including the final partial payment, will
she receive?
B. If she take out $30,000 immediately to buy a car but no
more, how much will she have in the fund at the end of 40 years
when she retires?
C. If she wants the fund to be worth $1,000,000 in 45 years,
how much can she withdraw today (single payment)?
D. What is the maximum amount that she can withdraw annually
for 25 years, starting at the end of the coming year?
Q3.Allied Electrons must purchase a new automatic soldering
machine to meet increased demand for its electronic goods. Of
all the machines considered, management has narrowed the
choices to the following three mutually exclusive machines.
Allied uses a planning horizon of four years (all three can last
this long) and a MARR of 10%. The initial cost is in Year 0
and the payments are in years 1-4. Determine the present worth,
future worth, and annual worth for when a) the salvage value is
in year 4, and b) the salvage value is in year 5.

6. Machine 1
Machine 2
Machine3
Initial Cost(in Year 0)
$700,000
$650,000
$550,000
Annual Operating Cost
$50,000
$90,000
$105,000
Salvage Value (in Year 4
$40,000
$32,500
$28,750
Salvage Value (in year 5
$40,000
$32,500
$28,750
Q4.Reputable Payday Loans (RPL) quoted Joe three loan
arrangements for a $1,000 loan. The first is to pay back the
loan in equal weekly payments 0.5% interest per week. A
second is to pay it back in equal semi-monthly payments (on the
15th and 30th) at 1% semi-monthly interest. A third option is
to pay it back in equal monthly payments at 2% monthly
interest. Compounding of interest is weekly, semi-monthly and
monthly respectively for each arrangement. What is the
effective annual rate for each alternative? What is the annual
percentage rate for each arrangement?
Q5.Technology Plus, LLC is evaluating three new product
offerings. Resources are available to do any or all of these.
The forecasted Cash Flows for each alternative are shown
below. Which one(s) should be approved if Internal Rate of

7. Return is the sole criteria and a MARR of 20% is used?
Marr=20%
CASH FLOW
Project
Year
0
1
2
3
4
5
Model 4000
($75,000)
$20,000
$20,000
$20,000
$20,000
$20,000
Model 5000
($250,000)
$70,000
$80,000
$85,000
$85,000
$80,000
Model 6000
($5000,000)

8. $60,000
$100,000
$200,000
$2000,000
$2000,000
Please provide separate excel spreadsheets for each (5)
question. ..Please. I should have 5 excel spreadsheets.