My work is in bold. Did I do these problems correctly? Subject: Corporate Finance regarding NPV and IRR calculations

1.You have been offered a very long-term investment opportunity. You can invest $1,100 today and expect to receive $128,000 in 40 years. Your cost of capital for this (very risky) opportunity is 16%.

N=40, r=?, PV = -1,100, PMT=0, FV=128,000r= 12.63% (BA II Plus Texas Instrument Calculator)

a.The IRR of this investment opportunity is __12.6________ %. (Round to one decimal place.)

The IRR is 12.6% and smaller than 16%.IRR rule says that you should NOT invest

The IRR rule says that you __________. (Select the best answer.)

A.should not invest

B.should be indifferent

C.should invest

NPV = -1,100 + 128,000 / (1.16)^40 = -762.02046

b.The NPV of this investment opportunity is a $___-762.02_______. (Round to the nearest cent.)

The NPV rule says that you __________. (Select the best answer.)

A.should not invest

B.should be indifferent

C.should invest

2.You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $10,000 and will be posted for one year. You expect that it will generate additional revenue of $1,900 a month. The payback period is _5.26____ months. (Round to two decimal places.)

Initial investment (Cost) of $10,000 for one year (12 months) and will generate $1,900 a month.The sum for one year is ($1,900 * 12 months) = $ 22,800

$10,000 = 1900x

X= 5.2631 months

3.You are considering making a movie. The movie is expected to cost $10.5 million upfront and take a year to make $4.9 million in the year it is released (end of year 2) and $1.7 million for the following four years (end of years 3 through 6).

0123456

$-10.5 million04.91.71.71.71.7

4.9 (year 1)+1.7(year 2)+1.7(year 3)+1.7(year 4)+1.7(year 5) = 11.7 (payback period is 5 years)

a.The payback period of this investment is ___5_______ years. (Round up to nearest integer.)

b.If you require a payback period of two years, would you make this movie? (Enter yes or no.)NO because it takes longer than 2 years. It takes 5 years to earn back initial investment.

c.If the cost of capital is 10.3%, the NPV is $___-2.07_______ million. (Round to two decimal places.)

0123456

-10.5 +0+ 4.9/(1.103^2)+1.7/(1.103^3) +1.7/(1.103^4) +1.7/(1.103^5)+ 1.7/(1.103^6) =

-10.5+0+4.02751.266841.14851.04120.94405 =

-10.5 + 8.42809 = -2.0719

4.AOL is considering two proposals to overhaul its network infrastructure. They have two bids. The first bid from Huawei will require a $15 million upfront investment and will generate $20 million in savings for AOL each year for the next three years. The second bid from Cisco requires an $81 million upfront investment and will generate $60 million in savings each year for the next three years.

a.What is the IRR for AOL associated with each bid?

N=3, r=?, PV = -15,000,000, PMT=20,000,000, FV=0 r=120.98 % (BA II Plus Texas Instrument Calculator)

The IRR associated with the bid from Huawei is ___120.98_______ %. (Round to one decimal place.)

N=3, r=?, PV = -81,000,000, PMT=60,000,000, FV=0r=53.66% (BA II Plus Texas Instrument Calculator)

The IRR associated with the bid from Cisco is __53.66________ %. (Round to one decimal place.)

b.If the cost of capital for this investment is 14%, what is the NPV for each bid?

0123

-15million + 20million/1.14+20million/1.14^2+20million/1.14^3

-15million + 17,543,859.649122+15,389,350.569405+13,499,430.32404

= 31,432,640.542567

The NPV for Huawei's bid is $____31.43______ million. (Round to two decimal places.)

0123

-81million + 60million/1.14+60million/1.14^2+60million/1.14^3

-81million +52,631,578.947+46,168,051.708+40,498,290.972

= 58,297,921.627121

The NPV for Cisco's bid is $___58.30_______ million. (Round to two decimal places.)

a.Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, AOL will pay $26 million upfront, and $35 million per year for the next three years. AOL's savings will be the same as with Cisco's original bid.

N=3, r=?, PV = -107 million (-81+-26 million) PMT=25million (60-35million) FV=0r=-15.86% (BA II Plus Texas Instrument Calculator)

The IRR of the Cisco bid is now ___-15.9_______%. (Round to one decimal place.)

The new NPV is $___-48.96_______ million. (Round to two decimal places.)

0123

-107million + 25million/1.14+25million/1.14^2+25million/1.14^3

-107million +21,929,824.561 +19,236,688.211+16,874,287.905

= -48,959,199.322

b.AOL should:

A.choose Huawei.

B.choose Cisco without lease.

C.choose Cisco with lease.

D.take none of the bids.