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Consumer Behavior Mkt 510

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Alpha Company
The Cash Flow Calculation

| |Y0 |Y1 |Y2 |Y3 |Y4 |Y5 |Y6 |
| |-200000 | | | | | | |
| |6000 | | | | | | |
|Revenue | |113000 |113000 |113000 |113000 |113000 |113000 |
|Expenses | |-60000 |-60000 |-60000 |-60000 |-60000 |-60000 |
|Depreciation | |-50000 |-50000 |-50000 |-50000 | | |
|Taxable income | |3000 |3000 |3000 |3000 |53000 |53000 |
|Tax @ 30% | |900 |900 |900 |900 |15900 |24900 |
|Salvage value | | | | | | |30000 |
|CGT | | | | | | |-7500 |

NPV@ 10% = 26982.10
IRR = ?

Bravo Company
Cash Flow Calculation

| |Y0 |Y1 |Y2 |Y3 |Y4 |Y5 |Y6 |
| |-250000 | | | | | | |
| |9375 | | | | | | |
|Revenue | |135000 |135000 |135000 |135000 |135000 |135000 |
|Expenses | |-73000 |-73000 |-73000 |-73000 |-73000 |-73000 |
|Depreciation | |-25000 |-25000 |-25000 |-25000 |-25000 |-25000 |
|Taxable income | |37000 |37000 |37000 |37000 |37000 |37000 |
|Tax @ 30% | |11100 |11100 |11100 |11100 |11100 |11100 |
|Salvage value | | | | | | |26000 |
|CGT | | | | | | |-22500 |

NPV@ 8% = 25074.92

Charlie Company
Cash Flow Calculation

| |Y0 |Y1 |Y2 |Y3 |Y4 |Y5 |Y6 |
| |-300000 | | | | | | |
| |13500 | | | | | | |
|Revenue | |150000 |150000 |150000 |150000 |150000 |150000 |
|Expenses | |-61000 |-61000 |-61000 |-61000 |-61000 |-61000 |
|Depreciation | |-45000 |-45000 |-45000 |-45000 |-45000 |-45000 |
|Taxable income | |44000 |44000 |44000 |44000 |44000 |44000 |
|Tax @ 30% | |13200 |13200 |13200 |13200 |13200 |13200 |
|Salvage value | | | | | | |10000 |
|CGT | | | | | | |6000 |

NPV@12.5% =

Part B

AROR = Revenue – Expenses * 100 Initial Cost

Alpha Company = 113000 – 60000 * 100 200000

= 26.5

Bravo Company = 135000 – 73000 * 100 250000

= 24.8

Charlie Company = 150000 – 61000 * 100 300000

= 29.67

1. Charlie 2. Alpha 3. Bravo

The higher the return better the project.

Part C

Yes bcz da NPV & AROR value z high

Part D

Alpha Company

PMT ….. …. … . .. PMT

0 1 2 3 4 5 6

PMT = 26982 N = 6 I = 6.5 PV = ?

PV = PMT [ 1-( 1+ I )-n ] I = 26982 [1- ( 1+ 0.065 ) -6 ] 0.065 = 130620.71

Bravo Company

PMT = 24612
N = 6
I = 6.5
PV = ?

PV = PMT [ 1-( 1+ I )-n ] I

= 24612 [ 1- ( 1+ 0.065 ) -6 ] 0.065 = 119150.07

Charlie Company

PMT = 28673
N = 6
I = 6.5
PV = ?

PV = PMT [ 1-( 1+ I )-n ] I

= 28673 [ 1- ( 1+ 0.065 ) -6 ] 0.065 = 138807.73

We would purchase Charlie project because it has a high present value

Part C

If I is 12% calculate the PV on each company & compare…

Alpha Company

PMT = 26982 N = 6 I = 12% PV = ?

PV = PMT [ 1-( 1+ I )-n ] I = 26982 [1- ( 1+ 0.12 ) -6 ] 0.12 = 110933.99

……………………………………………….

Bravo Company

PMT = 24612 N = 6 I = 12% PV = ?

PV = PMT [ 1-( 1+ I )-n ] I = 24612 [1- ( 1+ 0.12 ) -6 ] 0.12

= 101189.95

…………………………………………………

Charlie Company

PMT = 28673 N = 6 I = 12% PV = ?

PV = PMT [ 1-( 1+ I )-n ] I = 28673 [1- ( 1+ 0.12 ) -6 ] 0.12

= 117886.38

……………………………………..

Question 2

Po = Do * ( 1 + g ) r – g

7.6 = 0.5 [ 1+ 0.058 ] r – 0.058

7.6 ( r – 0.058 ) = 0.5 + 0.029

7.542r = 0.529

r = 0.529 7.542

= 0.0701

r =7.01%

2.)

I = 9.5%

PV = 8998.00

FV = 10000

N = 5*2

PMT = 9.5 * 10000 * 1/2 100

= 3.95 * 2

= 7.9%

a) first one has a lesser interest rate so th@ the best…………………..?

If the tax rate is 30% then r = 7.9%

= 7.9 [ 1 – 0.30 ]

= 7.9 * 0.7

= 5.53

We’ll choose the project b) since it has a lesser interest rate……..

Portfolio Management

……………………………………………………………………….
…………………………………………………………………………..
………………………………………

Question 3

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