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# NPV, Asset Beta

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Question 1

Bill is evaluating 2 mutually exclusive pollution devices. The real discount rate is 5%. The cash flows for each device are as follows

Time Device A Device B
0 (100,000) (200,000)
1 (5,000) (3,500)
2 (5,000) (3,500)
3 (5,000) (3,500)
4 (3,500)
5 (3,500)
6 (3,500)

a) Compute the cost of each machine in terms of NPV?
b) Which machine will be cheaper for the company to use? Explain

Question 2

Consider the following data for A Corporation and B Corporation
A Corp B Corp
Covariance with Market 34.2% 25.5%
Variance Market 30% 30%
% Debt 40 25
% Equity 60 75
D/E Ratio 67% 33%

Calculate the asset Beta for corporations A and B

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#### Solution Preview

Question 1

Bill is evaluating 2 mutually exclusive pollution devices. The real discount rate is 5%
The cash flows for each device are as follows

Time Device A Device B
0 -100,000 -200,000
1 -5,000 -3,500
2 -5,000 -3,500
3 -5,000 -3,500
4 -3,500
5 -3,500
6 -3,500

a)Â Â Â Â Â  Compute the cost of each machine in terms of NPV?
To calculate the NPV ( Net Present Value) we discount the cash flow at the given discount rates

Device A
Year Cash flow Discount factor @ Discounted cash flow=
5%
0 (100,000) 1 -100,000 =-100000*1
1 (5,000) 0.952381 -4,762 =-5000*0.952381
2 (5,000) 0.907029 -4,535 =-5000*0.907029
3 (5,000) 0.863838 -4,319 =-5000*0.863838
NPV= -113,616

NPV= (113,616)
NPV can also be calculated using Excel function ...

#### Solution Summary

Answers to 2 questions:
1) NPV of 2 mutually exclusive pollution devices;
2) asset Beta for corporations

\$2.49