Explore BrainMass

Explore BrainMass

    NPV, Asset Beta

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com June 3, 2020, 5:50 pm ad1c9bdddf
    https://brainmass.com/economics/output-and-costs/npv-asset-beta-39475

    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

    $2.19

    ADVERTISEMENT