Reference no: EM132895537
Question 1 - You have an opportunity to invest $108,000 now in return for $79,900 in one year and $29,200 in two years. If your cost of capital is 8.9%, what is the NPV of this investment?
Question 2 - Your storage firm has been offered $97,500 in one year to store some goods for one year. Assume your costs are $96,000, payable immediately, and the cost of capital is 8.7%. Should you take the contract?
Question 3 - Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $5,760 at the end of each of the next three years. The opportunity requires an initial investment of $1,440 plus an additional investment at the end of the second year of $7,200.
a) What is the NPV of this opportunity if the cost of capital is 1.7% per year?
b) Should Marian take it?
Question 4 - Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $4.79 million per year. Your upfront setup costs to be ready to produce the part would be $8.01 million. Your discount rate for this contract is 8.3%.
a. What does the NPV rule say you should do?
b. If you take the contract, what will be the change in the value of your firm?
Question 5 - Bill Clinton reportedly was paid $15.0 million to write his book My Life. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $8.8 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.3% per year.
a. What is the NPV of agreeing to write the book (ignoring any royalty payments)?
b. Assume that, once the book is finished, it is expected to generate royalties of $5.5 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?