Prof. Yexiao Xu
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…
(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:
5 iTV 25
15 iHome 20
(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