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Lepton Industries has a project with the following projected cash flows: o Initial cost:
$468,000o Cash flow year one: $135,000 o Cash flow year two: $240,000 o Cash flow year
three: $185,000 o Cash flow year four: $135,000
a) Using an 8% discount rate for this project and the NPV model, determine whether the company
should accept or reject this project.
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Answer:NPV= −InitialCost
�=0 (1+r)t
Where:
CFt = Cash flow at time t
r = Discount rate
n = Number of periods
Initial Cost = Initial investment cost
Given:
Initial cost: $468,000
Cash flow year one: $135,000
Cash flow year two: $240,000
Cash flow year three: $185,000
Cash flow year four: $135,000
Conclusion:
At an 8% discount rate, the NPV is $129,660, indicating that Lepton Industries should
accept the project.
b) Should the company accept or reject it using a 14% discount rate?
�
Answer:NPV= −InitialCost
���
�=0 (1+�)�
Where:
CFt = Cash flow at time t
r = Discount rate
n = Number of periods
Initial Cost = Initial investment cost
Given:
Initial cost: $468,000
Cash flow year one: $135,000
Cash flow year two: $240,000
Cash flow year three: $185,000
Cash flow year four: $135,000
Conclusion:At a 14% discount rate, the NPV is -$19,855, indicating that Lepton Industries
should reject the project.
�
Answer:NPV= −InitialCost
���
�=0 (1+�)�
Where:
CFt = Cash flow at time t
r = Discount rate
n = Number of periods
Initial Cost = Initial investment cost
NPV=NPV=112,500+166,667+108,078+62,891−468,000
NPV = -$18,864
Conclusion: At a 20% discount rate, the NPV is -$18,864, indicating that Lepton
Industries should reject the project.
2. Country Farmlands, Inc. is considering the following potential projects for this coming
year, but has only $200,000 for these projects:
Project A: Cost $60,000, NPV $4,000, and IRR 11%
Project B: Cost $78,000, NPV $6,000, and IRR 12%
Project C: Cost $38,000, NPV $3,000, and IRR 10%
Project D: Cost $41,000, NPV $4,000, and IRR 9%
Project E: Cost $56,000, NPV $6,000, and IRR 13%
Project F: Cost $29,000, NPV $2,000, and IRR 7%
What projects should Farmlands pick? (8 points)
Answer: projects along with their costs
We need to maximize the NPV while keeping the total cost of selected projects within
$200,000.
To solve this problem, let's start by sorting the projects based on their NPVs:
Now, let's start selecting projects while considering the budget constraint:
First, select Project B ($78,000) and Project E ($56,000) as they have the highest NPVs and
fit within the budget.
Remaining budget: $200,000 - $78,000 - $56,000 = $66,000
Now, we have $66,000 remaining. We can select more projects based on their NPVs until
the budget is exhausted.
Project B
Project E
Project A
This selection yields the highest total NPV while staying within the budget constraint.
3. Your broker faxed to you the following information about two semiannual coupon
bonds that you are considering as a potential investment. Unfortunately, your fax
machine is blurring some of the items, and all you can read from the fax on the
two different bonds is the following:
Fill in the missing data from the information that the broker sent. (9 points)
Answer:For the IBM Coupon Bond:
Face Value (Par): $1,000
Coupon Rate: 9.5%
Yield to Maturity: 7.5%
Years to Maturity: 10
Price: $689.15
Using the bond valuation formula, we can calculate the annual coupon payment and the yield to
maturity for the IBM Coupon Bond.
2.Calculate the yield to maturity (YTM) using trial and error or financial calculators. Since the
YTM is 7.5%, the bond's price should equal the present value of its future cash flows, including
both coupon payments and the face value.
Using financial calculators or spreadsheet functions, we can find that the IBM Coupon Bond price
of $689.15 matches the given YTM of 7.5%.
For the AOL Coupon Bond:
Given that the AOL Coupon Bond's YTM is 9.5%, the bond's price would be equal to its face
value because the YTM matches the coupon rate. This means the price of the AOL Coupon Bond
would be $1,000.
Therefore, the missing data for the AOL Coupon Bond is:
Price: $1,000