A-2 Appendix Answers to Select Basic Problems
bre44380_app_A1-A10 2 10/09/15 08:14 PM
can have positive NPV if all future cash flows are
considered but still do not meet the stated cutoff period.
- (a) $15,750; $4,250; $0; (b) 100%.
- (a) Two; (b) − 50% and +50%; (c) yes, NPV = $14.58.
- 1, 2, 4, and 6.
CHAPTER 5
- (a) A = 3 years, B = 2 years, C = 3 years; (b) B; (c) A,
B, and C; (d) B and C
(NPVA = –$1,011; NPVB = $3,378; NPVC = $2,405);
(e) true; (f) It will accept no negative-NPV projects but
will turn down some with positive NPVs. A project
Standard deviation, %
Expected return (r), %
20
14
22
20
18
16
22 24 26 28 30
R
Q
◗ FIGURE 1 Chapter 8, Problem 1(c).
2012 2013 2014 2015 2016
Working capital 50,000 230,000 305,000 250,000 0
Cash flows –50,000 –180,000 –75,000 +55,000 +250,000
CHAPTER 6
a, b, d, g, h.
(a) False; (b) False; (c) False; (d) False.
PV cost = 1.5 + .2 × 14.09 = $4.319 million. Equivalent
annual cost = $4.319/14.09 = $.3065 million.
Replace at end of 5 years ($80,000 > $72,350).
CHAPTER 7
- Expected payoff is $100 and expected return is zero.
Variance is 20,000 (% squared) and standard deviation
i s 141%. - Ms. Sauros: Av. return = 19.98%; Variance = 194.85;
SD = 13.96%.
S&P 500: Av. return = 16.02%; Variance = 105.95;
SD = 10.29%. - d
- (a) 26%; (b) zero; (c) .75; (d) less than 1.0 (the portfolio’s
risk is the same as the market, but some of this risk is
specific risk). - A, 1.0; B, 2.0; C, 1.5; D, 0; E, − 1.0.
CHAPTER 8
- (a) 7%; (b) 27% with perfect positive correlation;
1% with perfect negative correlation; 19.1% with no
correlation; (c) See Figure 1; (d) No, measure risk by
beta, not by standard deviation. - Sharpe ratio = 7.7/19.9 = .387.
- (a) See Figure 2; (b) A, D, G; (c) F; (d) 15% in C.
(e) Put 25/32 of your money in F and lend 7/32 at
12%: Expected return = 7/32 × 12 + 25/32 × 18
= 16.7%; standard deviation = 7/32 × 0 + (25/32)
× 32 = 25%. - (a) True; (b) False (it offers twice the market risk
premium); (c) False.
r
20
15
12
10
10 20 30
A
40 50
5
B
C
D
E
H
G
F
s
◗ FIGURE 2 Chapter 8, Problem 5(a).