Mike Garrabrant

Chapter 12:
1)

Pepsi Co has a bottling facility that can produce 350,000 bottles of cola. It can produce 150,000 bottles at the end of the first year and 200,000 bottles at the end of the second year. It costs $0.05 to produce each bottle of cola. The current forward prices are $0.75 at the end of the first year and $0.70 at the end of the second year. The annual compounded risk-free rates are 6 percent for one year zero coupon bonds and 7 percent for two year zero coupon bonds. What is the present value of the cash flows of the bottling facility if the payments are received at the end of each year?

Bottling facility value= $220,552

($0.75(150,000)-$0.05(150,000))/(1+0.06) + ($0.70(200,000)-$0.05(200,000))/(1+0.07)^2