Question 3

An investment costs $1500 and pays $120 annually in perpetuity. If the interest rate is 8%, what is the NPV?

(Remember to calculate the PV of the annual payments and then to subtract the original cost.)

Question 4

Assume that a firm has annual earnings of $5/share which are fully distributed to shareholders and which are expected to continue forever and grow at a constant rate of 4%. (Ignore tax effects.) Assume that the interest rate you expect to receive on an alternative investment of equal risk is 8%. What is the value of the firm based on the cash flow?

Question 5

As the holder of a winning lottery ticket, you can choose one of the following prizes: Assume that the interest rate is 10%. Which one has the highest value?

Group of answer choices

100,000 now

185,000 at the end of five years

11,400 a year forever

25,000 at the end of the year for each of 6 years

5,500 at the end of the year increasing by 5% a year forever