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This is mostly a conceptual question about the investment strategy all investors should prefer to use according to the CAPM. Suppose the market portfolio has an expected return of 12%, Portfolio A has an expected return of 14%, and the risk-free rate is 2%. According to the CAPM, how should an investor optimally achieve an expected return of 13.0% if the investor has $100,000 in cash? (Note: One of the three below is correct, and given this is the case, you should not actually need to do any calculations to know which one.)

All three of choices below achieve the desired expected return of 13%.

a. Invest $50,000 in Portfolio A, and invest $50,000 in the market portfolio.

b. Invest $91,666.67 in Portfolio A, and lend $8,333.33 at the risk free rate.

c. Invest $110,000 in the market portfolio, and borrow $10,000 at the risk-free rate.

 
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Morgan company is considering expanding its production capacity by purchasing a new machine, the AC250. The cost of the AC250 is $1 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the AC250, resulting in the following estimates: Marketing: Once the AC250 is operating next year, the extra capacity is expected to generate $10 million per year in additional sales, which will continue for the 5-year life of the machine. Operations. The disruption caused by the installation will decrease sales by $5 million this year. Once the machine is operating next year, the cost of goods for the products produced by the AC250 is expected to be 50% of their sale price. Human Resources: The expansion will require additional sales and administrative personnel at a cost of $0.4 million per year. Accounting: The AC250 will be depreciated via the straight-line method over the 5-year life of the machine. The firm expects receivables from the new sales to be 20% of revenues and payables to be 10% of the cost of goods sold. The increased production will require additional inventory on hand of $1.2 million to be added in year O and depleted in year 5. Morgan company’s marginal corporate tax rate is 20%. The appropriate cost of capital for the expansion is 9.9%. Required Assume you are financial consultant of Morgan company. Draft a report to Alex (Financial controller), and answer the following questions:

(a)Discuss why computing a project’s effect on the company’s earnings is insufficient for capital budgeting?

(b)Determine the annual depreciation tax shield from the purchase of the AC250, and explain how the tax shield impact on the Free Cash Flow?

(C)Explain what is the relevant cash flows? Should we include the cost of the feasibility study in the cash flows of the project? Why or why not?

(d)Compute the NPV of the purchase. Should we accept the project?
(e)According to the feasibility study report, the expected new sales will be $10.15 million per year from the expansion, estimates range from $8.20 million to $12.1 million. What is the NPV in the worst case? In the best case?
 
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A production line is to be designed for a job with three tasks. The task times are 0.6 minutes, 1.8 minutes, and 1.2 minutes. If the necessary cycle time is 1.2 minutes per unit, what is the theoretical minimum number of workstations? Select one: O a 2.0 Ob 3.6 ??. 4.0 Od 4.2 O?. 3.0 A production line is to be designed for a job with three tasks. The task times are 0.5 minutes, 1.8 minutes, and 1.1 minutes. If the necessary cycle time is 1.0 minutes per unit, what is the actual minimum number of workstations possible? Select one: O a5 Ob 2 Oc. 3 Od 4 O e 1
 
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A builder has located a piece of property that she would like to buy and eventually build on. The land is currently zoned for four homes per acre, but she is planning to request new zoning. What she builds depends on approval of zoning requests and your analysis of this problem to advise her. With her input and your help, the decision process has been reduced to the following costs, alternatives, and probabilities: Cost of land: $2 million. Probability of rezoning: 0.60. If the land is rezoned, there will be additional costs for new roads, lighting, and so on, of $1 million. If the land is rezoned, the contractor must decide whether to build a shopping center or 1,500 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 70 percent chance that she can sell the shopping center to a large department store chain for $4 million over her construction cost, which excludes the land; and there is a 30 percent chance that she can sell it to an insurance company for $5 million over her construction cost (also excluding the land). If, instead of the shopping center, she decides to build the 1,500 apartments, she places probabilities on the profits as follows: There is a 60 percent chance that she can sell the apartments to a real estate investment corporation for $3,000 each over her construction cost; there is a 40 percent chance that she can get only $2,000 each over her construction cost. (Both exclude the land cost.) If the land is not rezoned, she will comply with the existing zoning restrictions and simply build 600 homes, on which she expects to make $4,000 over the construction cost on each one (excluding the cost of land).

a) What is the expected value for the rezoned shopping center, if the rezoning cost is included? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

b) What is the expected value for the rezoned apartments, if the rezoning cost is included? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

c) If the land is rezoned, what should the contractor decide? And Why. 1 A. Build shopping center B. Build apartments

d) What is the expected revenue, if the land is not rezoned? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

e) What is the expected net profit of entire project? (Do not round your intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.)

2. (3 points) United Research Associates (URA) had received a contract to produce two units of a new cruise missile guidance control. The first unit took 4,000 hours to complete and cost $30,000 in materials and equipment usage. The second took 3,200 hours and cost $21,000 in materials and equipment usage. Labor cost is charged at $18 per hour. The company expects “learning” to occur relative to labor and also relative to the pricing of materials and equipment. The prime contractor has now approached URA and asked to submit a bid for the cost of producing another 2 guidance controls. Use learning table

a) What will the 4th unit cost to build? (Round your answer to the nearest dollar amount.)

b) What will be the average time for the 4 missile guidance controls? (Round your answer to the nearest whole number.)

 
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