# NPV, Asset Beta

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

Please see attached for full question.

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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) 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