1) You are the manager of General-Ford, a large North American automobilemanufacturer. Demand for your product has been high and you are looking at thefollowing three alternative plans:

Plan I:	Spend $40 million today on a factory in Alabama that will becompleted in 1 year. You expect to receive $24.2 million in profitsfrom this factory at the end of the second year, at which time youalso expect to sell the factory to Toyhonda, a Japanese competitor,for a further $24.2 million.
Plan II:	Spend $100 million today in a joint venture with Nisubishi. Youexpect to begin generating yearly profits of $11 million at the end ofthe first year and every year thereafter. You expect the joint ventureto last forever.
Plan III:	Spend $100 million today to buy stock in Google on which youexpect an annual rate of return of 12%, which you expect willcontinue forever.

The market interest rate is 10%. (Assume the inflation rate is constant at 0, and is

expected to remain so for the duration of the above investments.)

a) Which of the above plans would you undertake if you could undertake just one? Explain your answer and show any calculations.

b) Which of the plans would you do if you could do as many of them as you wish? Explain your answer and show any calculations.

c) If the prevailing market interest rate were 8%, and you could choose as many ofthe above plans as you liked, which would you choose?

2) Find the PV of a stream of payments lasting 4 years. Each payment is for $300, andthe discount rate is 5%. The payments are all received at the end of the year, startingwith the first payment, received exactly one year from the present. Show your work.

3) Find the PV of the following perpetuity:

Yearly payment = $5,000 (received at the end of each year)

Discount rate = 8%

Show your work.

4) You are negotiating to buy a small business. The seller assures you that the annualprofits will be stable forever at $15,000, and that they have a present discounted valueof $750,000, which is his asking price for the business.

Calculate the discount rate he must be using. Show your work.