Reference no: EM132962716

Question 1 - A company is considering investing in manufacturing equipment that has a three-year life. The purchase price of the equipment is $70 000 and at the end of the three-year period it will be sold for cash of $10 000. The equipment will be used to produce 6000 units each year of a product which earns a contribution per unit of $7. Incremental fixed costs are expected to be $12 000 per annum. The company has a cost of capital of 8 per cent per annum. Ignore tax and inflation. Calculate the sensitivity of the investment decision to a change in the cost of capital.

Question 2 - James is considering paying £50 into a fund on a monthly basis for ten years starting in one year's time. The interest earned will be 1 per cent per month. Once all of these payments have been made the investment will be transferred immediately to an account that will earn interest at 15 per cent per annum until maturity. The fund matures five years after the last payment is made into the fund. Calculate the terminal value of the fund in 15 years' time to the nearest pound.