Description

Remember that when you use the perpetuity formula, the formula automatically present values the perpetuity one period, so if you use the perpetuity formula in year 15, the result is as of the beginning of year 15!The Problem Set contains the actual question(s). Be sure to read each question carefully and answer all parts of each question.

Each Problem Set has two (2) documents: Problem Set (questions) and Excel Template.

Submission

Excel is the industry standard for finance work and is required to complete and submit each Problem Set. The provided Excel Template may be used or you may create an original spreadsheet. If you choose to use the Excel template provided, download it for better usability.

Every question should have its own tab.

Show all your formulas. This allows the instructor to better assess how to help you and award partial credit as she/he deems appropriate. If you do NOT show how you obtained the solution, you will NOT get credit.

You may only submit your assignment once, but you are encouraged to ask questions as you work through the problems.

Annuity

1

Discount rate

Growth rate

NPV

IRR

Cash flows:

Start

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6 and on

2

3

Best choice?

Best choice?

Software

Discount rate

Growth rate

NPV

IRR

Cash flows:

Start

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Extended Plan

Text answer here.

Text answer here.

Rental Property

Discount rate

Growth rate

NPV

IRR

Cash flows:

Start

Year 1

Year 2

Year 3 and on

Text answer here.

July 2000 pay due

Interest rate

Future value of July 2000 pay on July 1, 2011

Present value of 25 yearly payments

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Year 21

Year 22

Year 23

Year 24

Year 25

Text answer here.

ext answer here.

Sale price (M$) per plane

Down payment (%)

Cost per plane (M$)

Discount rate

Years

(in Million $)

# of planes sold

Investment

Revenues

Production Costs

Cash Flow

NPV

IRR

1

2

3

4

5

6

Years

7

8

9

10

11

12

No content – Intentionally left blank

MGMT 332

Corporate Finance I

Module 2: Discounted Cash Flow Valuations and Net Present

Value

Problem Set 2 Ã¢â‚¬â€œ Discounted Cash Flow Valuation and Net Present Value

1. You are offered three annuities for purchase. Annuities make payments over a specified

amount of time. Using the NPV (6.1% discount rate) and IRR methodologies,

calculate which annuity is the best choice:

#

Cost($)

Payments ($/yr)

Life (yrs.)

1

5,055

1,005

4

2

6,750

1,890 (growing @0.3%/yr.)

5

3

50,000

830 (growing @4.5%/yr.)

Forever

2. You purchase a new software for your firm. It costs $18,000 and will expand your business

cash flow by $5,000/year in year 1 growing by 2.5% per year after that. The system

will work for 4 years before you have to replace it.

What are the NPV (use a 6% discount rate) and IRR?

The vendor offers you another software costing $26,000 and lasting 8 years, with the

same cash flows and growth rates.

a. What are the NPV and the IRR in this case?

b. Should you get it?

3. You are looking to buy a rental property. After doing some analysis, you figure that this

opportunity presents the following cash flows:

Up-front cost = $655,000

Yearly cash flows (growing at 2%/year forever) = $21,000

Your opportunity cost of capital for this investment is 6%

a. What are the NPV and IRR?

b. Should you buy it?

4. Read Why the Mets Pay Bobby Bonilla $1.19 Million Every July 1

Run the numbers:

a. Use July 1, 2011, to calculate the future value of the $5.9M owed on July 1,

2000.

b. Use July 1, 2011, to calculate the present value of the 25 yearly payments of

$1,193,248.20.

c. If you were his investment advisor, what would you have advised him when the

Mets made the offer?

March 2021 | MGMT 332 | College of Business |worldwide.erau.edu

All rights are reserved. The material contained herein is the copyright property of Embry-Riddle

Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be

reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical,

photocopying, recording or otherwise without the prior written consent of the University.

5. The Airbus A230 has the following investments in R&D (in millions, all negative

cash flows):

$150M (year 1) $250M (year 2) $300M (year 3)

Each plane will be sold for $24.5M – 10% down and the rest due on delivery two

years later. The cost to produce each plane is $21M – these costs are

recognized on delivery. The Sales and Marketing Department says that you will

sell 25 planes (year 4), 30 planes (year 5), 50 planes/year (years 6-9), and 55

planes (year 10).

What are the NPV (as of the beginning of year 1) and the IRR

of the plane using a 6.6% discount rate?

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