Xacc/280 Week 9 Final Paper

There are two choices for Sally Jameson to choose, either receive $5,000 in cash or a stock option instead. In this case, the company gives Sally a European style call on a non-dividend paying stock now selling for $18.75, with an exercise price of $35, and a maturity of five years. There are also two scenarios if we assume that Sally Jameson is free to sell her options at any time or to hold options until maturity date.

1. Consider the $50,000 excess cash. Assume that Gary invests the funds in one-year CD.

a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?

(C) For my short term goal, I would put the money in my regular a savings accounts and for my long term goal, I would try to find a special high interest savings account since my normal savings account interest rate is very low.

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

b. What happens to the value of the option if you change it to 30%?

Suppose you have just won $100 in a lottery. You have a choice between two alternatives: (1) use it to buy a new shirt that costs $100, but are willing to pay $107; (2) put the money in a bank for one year and earn 10% interest. What is the opportunity cost of spending the money now to buy the shirt?

later in the project life. With a NPV of less than -$810,000, Scenario 6 is the project with the

B. My oil drilling policy will require lots of money, but not as much time.

Over the next three years they receive raises of $2000 per year. Sara decides to

Paul wants to choose one of the two investments opportunities over three possible scenarios. Investment 1 will yield a return of $10000 in scenario1, $2000 in scenario 2 and a negative return of $5000 in scenario 3.

Using the payback method, Proposal A has a payback period of 6 years and 3 months, as calculated using the formula:

If you selected B, congratulations – you’ve successfully evaluated through some crafty discounts to find the best deal. If you picked another answer, don’t worry, most of your customers are doing the same thing. In fact, clever marketers depend on this consumer behavior to increase sales.

(15 points) Your boss has requested that you analyze two projects for him and pick the one you would recommend for investment. Both projects have the same risk because they are in the same business, and their cash flows are: Project A (Year 0: -$100,000; Year 1: $30,000; Year 2: $40,000; Year 3: $50,000; Year 4: $100,410); Project B (Year 0: -$100,000; Year 1: 0; Year 2: $10,000; Year 3: $10,000; Year 4: $224,990). Which project will you recommend if the discount rate is 35%?

The given three transportation alternatives have different lives – Contract flight time option is an annual agreement, purchasing the aircraft has a life of 10 years where-as Aircraft time sharing has a contract for 5 years. Given the different life span of each of the alternatives, we will use 10 years as the time period for comparing each of these alternatives as per the Replacement-Chain method. Under this method, we will assume that Option-1 is renewed every year and Option-3 will get renewed once after 5 years