Ajax Corporation

In: Business and Management

Submitted By jonjo
Words 339
Pages 2
ASSIGNMENT ONE
Attempt all questions; all questions carry 10 marks each.
QUESTION ONE The Ajax Corporation has the following set of projects available to it: PROJECT | INVESTMENT REQUIRED ($ MILLION) | EXPECTED RATE OF RETURN | A | 500 | 23% | B | 75 | 18 | C | 50 | 21 | D | 125 | 16 | E | 300 | 14 | F | 150 | 13 | G | 250 | 19 |
*Note: All projects have equal risk.
Ajax can raise funds with the following marginal costs:
First $250 million 14.0%
Next 250 million 15.5
Next 100 million 16.0
Next 250 million 16.5
Next 200 million 18.0
Next 200 million 21.0
REQUIRED
Use the marginal cost and marginal revenue concepts to derive an optimal capital budget for Ajax.
QUESTION TWO
The demand for MICHTEC’s products is related to the state of the economy. If the economy is expanding next year (an above-normal growth in GNP), the company expects sales to be $90 million. If there is a recession next year (a decline in GNP), sales are expected to be $75 million. If next year is normal (a moderate growth in GNP), sales are expected to be $85 million. MICHTEC’s economists have estimated the chances that the economy will be either expanding, normal, or in a recession next year at 0.2, 0.5, and 0.3, respectively.
REQUIRED
a. Compute expected annual sales.
b. Compute the standard deviation of annual sales.
c. Compute the coefficient of variation of annual sales.
QUESTION THREE
Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $ 1 million per year for ten years. The company will have to provide product support expected to cost $100,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year.
REQUIRED
What is the NPV of this investment if the cost of capital is 6%? Should the firm…...

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