Question

2. A manufacturer wants to introduce new factory equipment that requires machinery to be purchased today for $120 million. This new machine will last for five years, and will be depreciated straight-line to a value of zero at the end of year five. The extra savings from the new machine are expected to produce project inflows of $47 million per year, beginning one year from today, for five consecutive years. The machine does carry extra costs such that project outflows will be $9 million per year, beginning one year from today, for five consecutive years. If the firm’s tax rate is 30% and the required rate of return is 12%, which of the following comes closest to the NPV of the new equipment project?

3. Consider a project with inflows of $20,000 and outflows of $13,000. If the tax rate is 32%, and if the cash flow in Year 1 is $6,500, what is the depreciation amount?

4. You write a put on Kane with an exercise price of $3.50 and a premium of $1.00. At the same time you buy a call on Kane with an exercise price also at $3.50 and a premium of $1.25. Calculate the profit or loss on both positions simultaneously if just prior to option expiration Kane’s stock price is $3.00.

5. Which of the following is (are) true: Holding all else the same, the premium of a put option on common stock will DECREASE if: I. the price of the underlying stock goes up. II. the volatility of the underlying stock gets smaller. III. the time to expiration gets shorter (less time).

	a.	None of the Above
	b.	II only
	c.	I only
	d.	III only
	e.	I II, and III

Answer 1

2)