Problem 1.a

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698 calculate the IRR for the project.

Problem 1.b

Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150. If the IRR of the project is 9.85% and if the cost of capital is 12%, would you accept or reject?

Problem 1.c

Story Company is investing in a giant crane. It is expected to cost $6.0 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3.0 million each year for three years. Calculate the NPV at 12%. Would you suggest company to invest?

Problem 1.d

The real interest rate is 3.0% and the inflation rate is 5.0%. What is the nominal interest rate?

Problem 1.e

Your firm expects to receive a cash flow in two years of $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year 2?