1. 1. C_xs represent the net cash flow of each period. C₀ will usually be negative because it is dominated by the outward cash flow that represents the purchase price of the necessary real capital goods. The interest rate, i, is the interest rate at which the firm could either borrow funds to finance the project or lend to the banking system.
2. Problems and Questions
   1. Why did i say that I represents the interest rate at which the firm could either borrow funds to finance the project or lend to the banking system? To put the question another way, what does i measure in terms of opportunity cost.
   2. How would your answer change for a firm with no credit history because it is new or an unfavorable credit history so that the i at which they can borrow is higher than the i at which they can lend.
   3. Suppose that the firm has internally generated savings, but can find no projects for which NPV > 0. What should the firm do to maximize shareholder value in these circumstances?
   4. What is the effect of an increase in i on the NPV of a given project?
   5. Suppose that a project generates the following cash flows (C_t) to set up a new factory in Slezakia; C₀ ($100,000) (contractors fees) C₁ ($200,000) (contractors fees) C₃ ($200,000) (contractors fees) C₄ - $1,000,000 (sales) Please calculate the NPV of the project using a discount rate (i) of 20% per year.
   6. A car company (the lessor) is advertising a 24-month lease of a car to a firm that wants to use it (the lessee) for $520/month. The lease requires a $2,500 down payment and a $100 disposition fee paid at the end of the lease. As an alternative deal, the lessor offers a 24-month lease with a single up-front payment of $12,780 plus a $500 refundable security deposit. The security deposit will be refunded (in the form of a $500 check) to the lessee at the end of the 24-month lease. Assuming an interest rate of 6% compounded monthly (see below for how to do this), which lease is the better deal in terms of NPV from the point of view of the lessee?