Question 3

A project has an initial investment of $270,000 for fixed equipment. The fixed equipment will be depreciated on a straight-line basis to zero book value over the three-year life of the project and have zero salvage value. The project also requires $38,000 initially for net working capital. All net working capital will be recovered at the end of the project. Sales from the project are expected to be $300,000 per year and operating costs amount to $100,000 per year. The tax rate is 30 percent.

(a) Calculate the initial cash flow (the cash flow at Year 0).

(b) Calculate the operating cash flow (OCF) using the tax shield approach for each of the three years: Year 1, Year 2 and Year 3 (final year). Provide answers for each of the three years.

(c) If the discount rate is 12 percent, calculate the project's net present value (NPV).

(d) Determine and explain whether the project should be accepted or not.

Question 4

(a) Suppose you have a 1-year old son and you want to provide $75,000 in 20 years toward his college education. You currently have $5,000 to invest. What interest rate must you earn to have the $75,000 when you need it?

(b) An investment will provide you with $800 at the end of each year for the next 20 years. If you deposit those payments into an account earning 8%, calculate the future value in 20 years.

(c) You want to receive $1,000 at the end of every month for the next 5 years. Calculate the amount you need to deposit today if you can earn 0.5% per month

(d) Suppose you have $200,000 today. You expect that you can earn 0.5% per month. How much could you receive at the end of every month for 5 years?