Homework Answers
Alpha
Let Cash Flows in Year n be denoted by CFn
Given,
CF0 = -2878925
CF1 = 1448625
CF2 = 1448625
CF3 = 1448625
CF4 = 1448625
CF5 = 1448625
Interest Rate = r = 0.14
NPV = ΣCFn/(1+r)n
= -2878925 + 1448625/(1+0.14)^1 + 1448625/(1+0.14)^2 +
1448625/(1+0.14)^3 + 1448625/(1+0.14)^4 + 1448625/(1+0.14)^5
= $2,094,321.92
Beta
Let Cash Flows in Year n be denoted by CFn
Given,
CF0 = -3727500
CF1 = 973750
CF2 = 973750
CF3 = 973750
CF4 = 2000000
CF5 = 2000000
Interest Rate = r = 0.14
NPV = ΣCFn/(1+r)n
= -3727500 + 973750/(1+0.14)^1 + 973750/(1+0.14)^2 +
973750/(1+0.14)^3 + 2000000/(1+0.14)^4 + 2000000/(1+0.14)^5
= $756,087.07
Alpha should be selected since it has higher NPV
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