Instructions: Either type or write your answers directly on this document and submit the completed assignment to your ESO. If you use additional documents to perform calculations, label them with your name and course number (MBA 570) and submit them as well. Each question is worth 10 points.
1. Honda Motor Company is considering offering a $4,000 rebate on its minivan, lowering the vehicle’s price from $25,000 to $21,000. The marketing group estimates that this rebate will increase sales over the next year from 48,000 to 68,000 vehicles. Suppose Honda’s profit margin with the rebate is $2,000 per vehicle. If the change in sales is the only consequence of this decision, what are its benefits and costs?
The benefits are $__________ million. (Round to one decimal place.)
The costs are $__________ million. (Round to one decimal place.)
Is this a good idea? (Answer Yes or No.)
2. Suppose the current market price of corn is $4.14 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $1.33 per bushel, at what market price of ethanol does conversion become attractive?
The price at which the conversion becomes attractive is $__________ per gallon. (Round to nearest cent.)
3. Suppose the risk-free interest rate is 6%.
a. Having $200 today is equivalent to having $__________ in one year. (Round to the nearest cent.)
b. Having $200 in one year is equivalent to having $__________ today. (Round to the nearest cent.)
c. Which would you prefer, $200 today or $200 in one year? (Enter response here)
d. Does your answer depend on when you need the money? Why or Why not?
A. Yes, because if you didn’t need it, it’s not worth $200.
B. Yes, because if you did need it today, it is more valuable than $200.
C. No, because if you did need it, you could borrow the $200.
D. No, because if you didn’t need it, then the $200 can be invested and would be worth more than $200 in one year.
4. Your firm has a risk-free investment opportunity where it can invest $165,000 today and receive $174,000 in one year. The project will be attractive when the interest rate is any positive value less than or equal to __________%.(Round to two decimal places.)
5. Your firm has identified three potential investment projects. The projects and their cash flows are shown below:
Cash Flow Today (millions)
Cash Flow in One Year (millions)
Suppose all cash flows are certain and the risk-free interest rate is 11%.
a. What is the NPV of each project?
The NPV of project A is $__________ million. (Round to two decimal places.)
The NPV of project B is $__________ million. (Round to two decimal places.)
The NPV of project C is $__________ million. (Round to two decimal places.)
b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule?(Select the best choice.)
A. Project B
B. Project C
C. Project A
D. Cannot tell
c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule?(Select the best choice.)
A. Projects A and B
B. Projects B and C
C. Projects A and C
D. Cannot tell
6. Compute the following:
a. The present value of $2,000 received 14 years from today when the interest rate is 10% per year is $__________. (Round to the nearest dollar.)
b. The present value of $2,000 received 23 years from today when the interest rate is 12% per year is $__________. (Round to the nearest dollar.)
c. The present value of $2,000 received 7 years from today when the interest rate is 5% per year is $__________. (Round to the nearest dollar.)
7. Your daughter is currently 5 years old. You anticipate that she will be going to college in 13 years. You would like to have $156,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 5% per year, you should deposit $__________ today to ensure that you will have $156,000 in 13 years. (Round to the nearest dollar.)
8. Suppose you receive $180 at the end of each year for the next three years:
a. If the interest rate is 10%, the present value of these cash flows is $__________.(Round to the nearest cent.)
b. The future value in three years of the present value you computed in (a) is $__________.(Round to the nearest cent.)
c. Suppose you deposit the cash flows in a bank account that pays 10% interest per year:
The balance in the account at the end of year one is $__________ (Round to the nearest cent.)
The balance in the account at the end of year two is $__________ (Round to the nearest cent.)
The balance in the account at the end of year three is $__________ (Round to the nearest cent.)
The final bank balance in (c) is __________ the bank balance from part (b). (Select the best answer.)
A. equal to
B. lower than
C. higher than
9. You have just received a windfall from an investment you made in a friend’s business. He will be paying you $49,024 at the end of this year, $98,048 at the end of the following year, and $147, 072 at the end of the year after that (three years from today). The interest rate is 6.4% per year.
a. The present value of your windfall is $__________ (Round to the nearest dollar.)
b. The future value of your windfall in three years (on the date of the last payment) is $__________ (Round to the nearest dollar.)
10. You have an investment opportunity that requires an initial investment of $7,500 today and will pay $11,500 in one year. The internal rate of return (IRR) of this opportunity is $__________%. (Round to the nearest integer.)
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