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# Problem 1 Cece Equestrian Tours Probability NPVA NPVB 15% (34,000) (12,750) 20% (8,500) 2,125 30% 17,000 17,000 20% 42,500 31,875 15% 68,000 46,750 Expected NPV Variance Standard Deviation Coefficient...

Problem 1
Cece Equestrian Tours
Probability    NPVA    NPVB
15%    (34,000)    (12,750)
20%    (8,500)    2,125
30%    17,000    17,000
20%    42,500    31,875
15%    68,000    46,750
Expected NPV
Variance
Standard Deviation
Coefficient of Variation
Prob(NPV <= 0)
Cece Equestrian Tours is evaluating 2 mutually exclusive projects. The probabilities of the different project returns are shown below.
1. Calculate the expected NPV. Which project is better?
2. Calculate the variance and standard deviation. Now which project is better?
3. Calculate the coefficient of variation and the probability of negative return. Does this change your decision?
Problem 2
Salida Salt Company
State Rock Salt Contract Analysis
Amount of Rock Salt per Year    23,000 Tons
Revenue per Ton    \$ 135
Cost of Equipment    \$ 1,490,000
Life    5
MACRS Class    5
Fixed Cost    \$ 350,000
Var Cost/Ton    \$ 105
Total Var Cost    \$ 2,415,000
Actual Salvage    \$ 105,000
Change in NWC    \$ 85,000
Required Return    10%
Tax Rate    36%
MACRS schedule 5 year class
Year    Depreciation percent
1    0.2
2    0.32
3    0.192
4    0.1152
5    0.1152
6    0.0576

Net Present Value
Payback Period
Discounted Payback Period
IRR
MIRR
Susan's Salt Company is evaluating a possible Rock Salt Contract. The contract runs 5 years with 23,000 tons to be delivered per year. The revenue per ton is \$135 and the variable cost per ton is \$105. The machinery will cost \$1,490,000 and is to be depreciated using MACRS 5 year class. FC per year are \$350,000. After 5 years the equipment can be sold for \$105,000 in salvage value. There is an \$85,000 investment needed in net working capital that will be recovered in year 5. The required return is 10% and the company tax rate is 36%.
1. Calculate the Annual Cash Flows for the project.
2. Calculate the NPV.
3. Calculate the payback and discounted payback
4. Calculate the IRR and MIRR.
5. Should the company pursue the contract?
Answered 1 days After Mar 06, 2022

## Solution

Prince answered on Mar 07 2022
Problem 1
Cece Equestrian Tours
Probability    NPVA    NPVB
15%    (34,000)    (12,750)
20%    (8,500)    2,125
30%    17,000    17,000
20%    42,500    31,875
15%    68,000    46,750
Expected NPV
Variance
Standard Deviation
Coefficient of Variation
Prob(NPV <= 0)
Probability    NPVA    NPVB    A pr(Exp - CF)^2    B pr(Exp - CF)^2
15%    (34,000)    (12,750)    \$390,150,000    \$132,759,375
20%    (8,500)    2,125    \$130,050,000    \$44,253,125
30%    17,000    17,000    \$0    \$0
20%    42,500    31,875    \$130,050,000    \$44,253,125
15%    68,000    46,750    \$390,150,000    \$132,759,375
Expected NPV    17,000.00    17,000.00
Variance    1,040,400,000.00    354,025,000.00
Standard Deviation    32,255.23    18,815.55
Coefficient of Variation    1.90    1.11
Prob(NPV <= 0)    35%    15%
Answer 1    Since, Expected NPV of Both Project is same, which project to be decided, can be chosen
Answer 2    Project A has a higher Standard Deviation and Variance as compared to Project B, Hence, the investment in the Project A would be risker.
Answer 3    Probability of Negative return in Project B is lower than Project, Hence Project A is more advisable to select. Hence, Yes the decision has changed.
Cece Equestrian Tours is evaluating 2 mutually exclusive projects. The probabilities of the different project returns are shown below.
1. Calculate the expected NPV. Which project is better?
2. Calculate the variance and standard deviation. Now which project is better?
3. Calculate the coefficient of variation and the probability of negative return. Does this change your...
SOLUTION.PDF