Icfai P. A. Test Iii (2008)
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1.
An electronics company is considering investing in a new plant where it will produce either television components or circuit components, for a new, as of now untested computer. Their financial consultant predicts that the returns from an investment in television components will be independent of each other and will have the following means and variances. Year 1 2. 3 4. 5
Expected Returns (Rs.) 1,00,000 80,000 2,00,000 2,00,000 2,00,000
Variance of Returns (Rs.) 20,000 15,000 30,000 40,000 50,000
The computer components’ returns on the other hand are thought to be perfectly correlated with ach other, as all of them will depend on the market’s acceptance of the new computer. The returns on the investment have an expected value of Rs. 1,40,000 and a variance of Rs. 40,000 each year. Assume that both the investments can be made for Rs. 5,00,000 each and that the firm’s cost of capital is 10%. Find the NPV and the variance of the NPVB for both the investment alternatives. Which alternative will you choose and why? 2.
M/S Samatha Enterprises is evaluating the following projects: (Rs. in lakhs) Project A B C D E Initial Investment 30 50 60 90 105 Annual cash inflow 9 17 20 22 35 Life(years) 5 4 5 6 4 Salvage value 2 2 8 10 ____________________________________________ The maximum permissible capital outlay for the company is Rs. 180 lakh. Project C is a prerequisite for Project E. Projects B and E are mutually exclusive. There are no other interdependencies. Cost of capital is 14%. You are required to: (i) Rank the projects on the basis of NPV; (ii) Based on NPV, choose the projects that should be accepted subject to the given capital budget and the project interdependencies.
(20)
3.
Three assets, designated A, B, and C have expected returns of 0.12, 0.18, and 0.24 respectively. The variances and co-variances are as follows: The risk- return characteristics of the projects are: E(Ri)% σj %
A 12 2
A B C
A 0.02 0.1 -0.03
B 18 4
C 24 5 B 0.01 0.06 0
C -0.03 0 0.08
What is the expected return and standard deviation of a portfolio consisting of 40 percent of funds in A, 30 percent funds in B, and 30 percent funds in C?
An electronics company is considering investing in a new plant where it will produce either television components or circuit components, for a new, as of now untested computer. Their financial consultant predicts that the returns from an investment in television components will be independent of each other and will have the following means and variances. Year 1 2. 3 4. 5
Expected Returns (Rs.) 1,00,000 80,000 2,00,000 2,00,000 2,00,000
Variance of Returns (Rs.) 20,000 15,000 30,000 40,000 50,000
The computer components’ returns on the other hand are thought to be perfectly correlated with ach other, as all of them will depend on the market’s acceptance of the new computer. The returns on the investment have an expected value of Rs. 1,40,000 and a variance of Rs. 40,000 each year. Assume that both the investments can be made for Rs. 5,00,000 each and that the firm’s cost of capital is 10%. Find the NPV and the variance of the NPVB for both the investment alternatives. Which alternative will you choose and why? 2.
M/S Samatha Enterprises is evaluating the following projects: (Rs. in lakhs) Project A B C D E Initial Investment 30 50 60 90 105 Annual cash inflow 9 17 20 22 35 Life(years) 5 4 5 6 4 Salvage value 2 2 8 10 ____________________________________________ The maximum permissible capital outlay for the company is Rs. 180 lakh. Project C is a prerequisite for Project E. Projects B and E are mutually exclusive. There are no other interdependencies. Cost of capital is 14%. You are required to: (i) Rank the projects on the basis of NPV; (ii) Based on NPV, choose the projects that should be accepted subject to the given capital budget and the project interdependencies.
(20)
3.
Three assets, designated A, B, and C have expected returns of 0.12, 0.18, and 0.24 respectively. The variances and co-variances are as follows: The risk- return characteristics of the projects are: E(Ri)% σj %
A 12 2
A B C
A 0.02 0.1 -0.03
B 18 4
C 24 5 B 0.01 0.06 0
C -0.03 0 0.08
What is the expected return and standard deviation of a portfolio consisting of 40 percent of funds in A, 30 percent funds in B, and 30 percent funds in C?
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