2020 Moed B - Business, econ, entrepreneurship - final-1 (1).pdf Page 4 of 13 Question 1 (24 points) "Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint...

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2020 Moed B - Business, econ, entrepreneurship - final-1 (1).pdf Page 4 of 13 Question 1 (24 points) "Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries. To manufacture the product, Randy’s will have to buy a strawberries processor machine. In addition, since the old ice-cream machine of the company broke down it has to replace it with a new one. Below is the purchasing information of the two machines: - A strawberries processor machine: The machine costs $500,000 and is depreciated in a straight line over 4 years. This machine has a salvage value of $30,000. - A new ice-cream machine: The machine costs $850,000 and is depreciated in a straight line over 5 years. This machine has a scrap (salvage) value of $200,000. Other information: The strawberry mint ice-cream project's estimated lifecycle is 5 years. Randy’s estimates that in the first year the Product will have revenues of $1 million, and then revenues are expected to increase by 12% annually. Production costs are expected to be 60% of the revenues. Marketing costs are expected to be 30% of the revenues in the first year and then after 10% of the revenues in the following years. At the end of year 5 Randy’s estimates that it will be able to sell the strawberries process machine for $120,000. The ice-cream machine will worth 0 and therefore will not be sold. During the last 5 years, Randy’s has spent $20,000 in the development the of the strawberry mint ice cream. To support the project, the Randy’s will need to invest in working capital. The company will need to invest at the beginning of each year in inventory 10% of the expected revenues in the following year, in accounts receivables 25% of the current year’s revenues. Accounts payable will amount to 15% of the cost of goods sold at the beginning of each year. All the working capital will be recovered at the end of the project in 5 years. Randy’s corporate tax is 25% and Capital gain tax is 20%. Randy’s cost of capital is 13%. Should Randy’s undertake the project? You should write your answers on this paper. There should be plenty of space to show your work. Please show all work required to obtain each answer. Answers without justification will receive no credits, unless otherwise instructed in the question. If you make any additional assumptions, state them clearly. Page 5 of 13 Page 9 of 13 c. Assuming that the actual inflation is the same as expected one, what is your 60th nominal contribution to the retirement plan (the amount you deposit at the end of year five, in cash)? Answer: Your 60th contribution to the retirement plan is: $ . d. You estimate that you will live until the age of 90. How much money, in real terms, will you be able to withdraw each month from the age of 60 until the age of 90? Answer: You will be able to withdraw $ in real terms each month. Page 12 of 13 Question 5 (25 Points) You are the new investment manager of Michael and Ariel. You received from the previous investment manager of Michael and Ariel’s partial information regarding their portfolios: - Both have an optimal portfolio. - The expected return in Michael’s portfolio is 6%. - The SD in Ariel’s portfolio is 12%. You know that the current risk-free interest rate is 5% and the market portfolio has an expected return of 8% and a SD of 10%. a. What is the proportion of each brother’s investment in a risk-free asset out of their portfolio? Answer: the proportion of Michael’s investment in a risk-free asset out of his portfolio is __________% the proportion of Ariel’s investment in a risk-free asset out of her portfolio is __________% Page 13 of 13 b. Is it possible to rank the brothers’ risk preference? Explain. c. What is the beta in each brother’s portfolio? Answer: the beta of Michael’s portfolio is ___________ the beta of Ariel’s portfolio is __________ d. Suppose that today Michael and Ariel received an offer to buy a share with an expected return of 6% and beta of 0.3. Will they accept the offer? Answer: Michael will accept / not accept the offer Ariel will accept / not accept the offer