Question
A B
3 Discount rate 25%
4
5 Year Cash flow
6 0 -1,000
7 1 100
8 2 200
9 3 300
10 4 400
11 5 500
12 6 600
a. Calculate the present value of the future cash flows of the project.
b. Calculate the project's net present value.
c. Calculate the project's internal rate of return.
d. Should you undertake the project?
2. Your firm is considering two projects with the following cash flows:
A B C
1 Discount rate 12%
2
3 Year Project A Project B
4 0 -500 -500
5 1 167 200
6 2 180 250
7 3 160 170
8 4 100 25
9 5 100 30
a. If the appropriate discount rate is 12%, rank the two projects.
b. Which project is preferred if you rank by IRR?
c. Calculate the crossover rate-the discount rate r in which the NPVs of both projects are equal.
d. Should you use NPV or IRR to choose between the two projects? Give a brief discussion.
3. Here is the monthly stock price data for Ford Corp. and GM Corp.
A B C D
1 PRICE FOR FORD AND GM STOCK
2 Date Ford GM
3 8-Nov-99 24.44 66.08
4 1-Dec-99 25.79 65.09
5 3-Jan-00 24.32 72.14
6 1-Feb-00 20.35 68.54
7 1-Mar-00 22.45 74.63
8 3-Apr-00 27.00 84.37
9 1-May-00 23.95 64.02
10 1-Jun-00 22.08 52.63
11 3-Jul-00 24.17 51.61
12 1-Aug-00 21.95 63.97
13 1-Sep-00 23.14 59.40
14 2-Oct-00 23.98 56.77
15 1-Nov-00 20.89 45.64
16 1-Dec-00 21.52 46.96
17 2-Jan-01 26.16 49.51
18 1-Feb-01 25.30 51.77
Calculate the following:
Monthly returns for each firm
Covariance between returns of Ford.Corp.and GM Corp
Correlation between returns of Ford Corp.and GM Corp
4. Using the returns of Ford and GM Corporation you calculated in the previous question, perform a regression of Ford's returns versus GM's returns. Report the following:
- The slope of the regression
- The value of the intercept
- The r- squared of the regression
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