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Problem 1 Cece Equestrian Tours ProbabilityNPVANPVB 15%(34,000)(12,750) 20%(8,500)2,125 30%17,00017,000 20%42,50031,875 15%68,00046,750 Expected NPV Variance Standard Deviation Coefficient...

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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 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 AfterMar 06, 2022

Solution

Prince answered on Mar 07 2022
55 Votes
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...
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