Question #2 (10 Points)

RAK Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20-year cash flow? Use an 7% discount rate.

Question #3 (8 Points)

You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was your annual rate of return on your investment?

Question #4 (10 Points)

You plan on depositing $10,000 at the end of each year for 30 years into a retirement account that pays 5% interest. How much could you withdraw annually in equal beginning of year amounts starting at the time you make your last deposit and continuing for a total of 20 years, assuming balances continue to earn 5% until withdrawn?

Question #5 (10 Points)

Suppose you borrowed $15,000 at a rate of 9% and must repay it in 5 equal installments at the end of each of the next 5 years. What is the outstanding balance of the loan at the end of second year?

Question #6 (12 Points)

Dubai Manufacturing Co. has a bond of $1000 par value outstanding. It pays interest annually and carries an annual coupon rate of 8%. Bonds are issued 2 years ago & due in 10 years. If the market rate of return on bonds is 7%. Required: a. What is the current price of the bond? Explain whether the bond will sell at a discount or a premium?

b. Would the price of the bond be any different if interest was paid semi-annually instead of annually? Explain?

c. Explain what would happen to the bond price 5 years from now if the market interest rate remained the same at 7%. Explain what would be the market value of the bond at maturity date.

Question #7 (20 Points)

Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce annual sales of $110,000 with associated costs (other than depreciation) of $70,000. Kurts pay $5,000 a year as interest on its debt. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the annual operating cash flow for this project?

Question # 8 (20 Points)

Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not?

Question #9 (10 Points)

You just heard one of your colleagues saying that means that the project makes no profit no loss? Do you agree with your friend? Explain. Describe how share prices should respond to a (NPV=+) and a (NPV=-) management decisions. Consider only financial claimants to a firm's cash flows.