MBA ECON740 – The Ajax Corporation has the following set of projects available

60Part I: Introduction3. The Ajax Corporation has the following set of projects available to it:PROJECT*IN VESTM E NT REQUIRED( $ M I LL I O N )EXPECTED RATEOF RETURN (%)A50023.0B7518.0C5021.0D12516.0E30014.0F15013.0G25019.0*Note: All projects have equal risk.Ajax can raise funds with the following marginal costs:First $250 million14.0%Next 250 millionNext 100 million15.516.0Next 250 million16.5Next 200 millionNext 200 million18.021.0Use the marginal cost and marginal revenue concepts developed in this chapter toderive an optimal capital budget for Ajax.4. ESPN currently pays the NFL $1.1 billion per year for eight years for the right to exclu-sively televise Monday Night Football. What is the net present value of this investmentif the parent Disney Company has an opportunity interest rate equal to its cost of capital of 9 percent. Fox and CBS agreed to pay $712 million and $622 million respectivelyfor six years to televise Sunday afternoon NFC games. What was that worth?5. The demand for MICHTEC’s products is related to the state of the economy. If theeconomy is expanding next year (an above-normal growth in GNP), the companyexpects 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 inGNP), sales are expected to be $85 million. MICHTEC’s economists have estimatedthe chances that the economy will be either expanding, normal, or in a recessionnext year at 0.2, 0.5, and 0.3, respectively.a. Compute expected annual sales.b. Compute the standard deviation of annual sales.c. Compute the coefficient of variation of annual sales.6. Two investments have the following expected returns (net present values) and standard deviation of returns:PROJECTEX P E C T ED R E T U R N S ( $ )S T A N D A R D DE VI A T I O N ( $ )A50,00040,000B250,000125,000Which one is riskier? Why?Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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