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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 $)
# of planes sold
Investment
Revenues
Production Costs
Cash Flow
NPV
IRR
1
2
3
4
5
6
Years
7
8
9
10
11
12
No content – Intentionally left blank
MGMT 332
Corporate Finance I
Module 2: Discounted Cash Flow Valuations and Net Present
Value
Problem Set 2 – Discounted Cash Flow Valuation and Net Present Value
1. You are offered three annuities for purchase. Annuities make payments over a specified
amount of time. Using the NPV (6.1% discount rate) and IRR methodologies,
calculate which annuity is the best choice:
#
Cost($)
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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