a. choose between a perpetuity of $45,000/year inflating at 2%/year and a lump sum payment of $1,255,000.Use a 5.5% discount rate.Use the box to explain your choice.

b. run NPVs and IRRs for three airplane fuel pumps.Use a 12% discount rate:

Pump A costs $35,000 and saves the firm $5,000 each year for years 1-15

Pump B costs $35,000 and saves the firm $4,500 each year for ever

Pump C costs $35,000 and saves $4,000 in year 1; this saving continues for ever, increasing 4% per year

c. provide a 25% guaranteed cash flow IRR to an airline flying to your airport. The airline's cash flows are minus $1 million at the start and positive $371,739 each year for years 1-4.Calculate the subsidy to be paid at the start.Explain your answer in the box provided.

d. calculate the implicit interest rate (IRR) of a computer lease.The computers cost $30,000 at the start and pay a yearly lease of $12,000 for years 1-3.The salvage value is $1,000 at the end of year 4.Explain your answer in the box provided.If the firm can borrow at 8.5% from the bank, should it borrow from the bank or lease?

1 C N Lump Sum PV of annual payments Increase IRR to 25% Annual Payment Start Discount rate Year 1 Year ? Year 3 Year 4 Cash Flows 5 Annual inflator Subsidy Subsidized CF B IRR - Cash Flows B Pump A Pump B Pump C IRR - Subsidized CF