Fin 6301

Prof. Yexiao Xu

Section 001

Fall 2015
Problem Set #2
Due in class by 1:00 PM Wednesday, September 16, 2015

Show your work!
1. Mary is interested in driving a new 2015 Ford Taurus for three years. The Ford dealer quoted Mary two options— financing or leasing. The leasing deal requires a down payment of $1,999 and a monthly payment of $239 for 36 months. Alternative she can purchase Taurus at $21,999 using dealer’s promotional financing deal at 2.99% interest rate (APR on a monthly base) for 36 months. At the end of the 36 month, the car is worth 65% of the purchase price. (that is, if she leases the car, she can buy the car from the dealer at that price; if she purchases the car, she can sell the car at that …show more content…
Its opportunity cost of capital (i.e., the discount rate) for each project is 10%.
(a) Compute the profitability indexes for each project.
(b) What are the NPVs for each of the four projects?
(c) Suppose Martin Midstream has a $19 million investment budget. The projects are not divisible. Which project(s) should be taken?

5. In facing competition, Apple Inc. is debating whether to enter the TV business by launch a new product called iTV or to introduce a smart home control system called iHome, which require investment of $40 million and $65 million respectively. The projected investment and cash flows for the two proposed projects are:
Year
1
2
3
4
5 iTV 25
25
15
15
15 iHome 20
20
20
40
40
(a) Which project should Apple choose? (Assuming the discount rate is 10%.) Now, which project should Apple choose if the discount rate were 15% instead, and why?
(b) By examining the pattern in the NPVs, which project has a higher internal rate of return? Find the IRR for each project using “trial-an-error” method. Is there any reason