Quantitative Methods 【Reading 6】Sample capital, following, budgeting, project

andytrader

The capital budgeting director of Green Manufacturing is evaluating a laser imaging project with the following characteristics:

• Cost: $150,000
• Expected life: 3 years
• After-tax cash flows: $60,317 per year
• Salvage value: $0

If Green Manufacturing’s cost of capital is 11.5%, what is the project’s internal rate of return (IRR)?

A) 13.6%.

B) $3,875.

C) 10.0%.

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Since we are seeking the IRR, the answer has to be in terms of a rate of return, this eliminates the option not written in a percentage.
Since they payments (cash flows) are equals, we can calculate the IRR as: N = 3; PV = 150,000; PMT = 60,317; CPT → I/Y = 9.999

terpsichorefan

thanks for sharing

jawz

A Treasury bill, with 45 days until maturity, has an effective annual yield of 12.50%. The bill's holding period yield is closest to:

A) 1.57%.

B) 1.54%.

C) 1.46%.

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The effective annual yield (EAY) is equal to the annualized holding period yield (HPY) based on a 365-day year. EAY = (1 + HPY)365/t − 1. HPY = (EAY + 1)t/365 − 1 = (1.125)45/365 − 1 = 1.46%.

jawz

A Treasury bill has 90 days until its maturity and a holding period yield of 3.17%. Its effective annual yield is closest to:

A) 13.49%.

B) 13.30%.

C) 12.68%.

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The effective annual yield (EAY) is equal to the annualized holding period yield (HPY) based on a 365-day year. EAY = (1 + HPY)365/t − 1 = (1.0317) 365/90 − 1 = 13.49%.

jawz

What is the effective annual yield of a T-bill that has a money market yield of 5.665% and 255 days to maturity?

A) 5.79%.

B) 5.92%.

C) 4.01%.

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Holding Period Yield = 4.0127% = 5.665% × (255 / 360)
Effective Annual Yield = (1.040127)365/255 = 1.0571 − 1 = 5.79%.

jawz

The holding period yield of a T-bill that has a bank discount yield of 4.70% and a money market yield of 4.86% and matures in 240 days is closest to:

A) 3.2%.

B) 2.8%.

C) 4.9%.

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4.86 × (240/360) = 3.24%.

jawz

The effective annual yield for an investment is 10%. What is the yield for this investment on a bond-equivalent basis?

A) 9.76%.

B) 4.88%.

C) 10.00%.

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First, the annual yield must be converted to a semiannual yield. The result is then doubled to obtain the bond-equivalent yield.

Semiannual yield = 1.10.5 − 1 = 0.0488088.
The bond-equivalent yield = 2 × 0.0488088 = 0.097618.

jawz

If the holding period yield on a Treasury bill (T-bill) with 197 days until maturity is 1.07%, what is the effective annual yield?

A) 0.58%.

B) 1.07%.

C) 1.99%.

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To calculate the EAY from the HPY, the formula is: (1 + HPY)(365/t) − 1. Therefore, the EAY is: (1.0107)(365/197) − 1 = 0.0199, or 1.99%.

optiix

A broker calls with a proposal to buy a Treasury bill (T-bill) with 186 days to maturity. He says the effective annual yield on the T-bill is 4.217%. What is the holding period yield if you hold the bill until maturity?

A) 8.44%.

B) 2.13%.

C) 2.02%.

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To calculate the HPY from the EAY, the formula is: (1 + EAY)(t/365) − 1. Therefore, the HPY is: (1.04217)(186/365) − 1 = 0.0213, or 2.13%.

optiix

If the money market yield is 3.792% on a T-bill with 79 days to maturity, what is the holding period yield?

A) 0.77%.

B) 0.83%.

C) 0.89%.

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The holding period yield can be calculated from the money market yield as: (money market yield) ÷ (360 ÷ t). Therefore, the HPY is (0.03792) × (79 ÷ 360) = 0.0083 = 0.83%.