Question
Whenever possible, draw the time line first and show work. 1.For the following cash-flows (CF's):$100 in year one, $200 in years two and three, and
Whenever possible, draw the time line first and show work.
1.For the following cash-flows (CF's):$100 in year one, $200 in years two and three, and $400 in years four and five. The current interest rate is 7%.
- How much are you willing to pay today?
- How about in year 6?
- How about in year 3?
- If an investor contributes $100 each year and can earn 8% per year, what is the present value of this cash stream?
- Assume a 10% discount rate. Which among the choices below have the highest value, A or B, if any? Show work.
A.$1,000 per year for perpetuity (first payment at the end of the first period).
B.$10,000 in cash
4. (NPV) A company has the choice between two different types of machines. Machine A costs less, but it also has a shorter life expectancy of two years. B costs more but lasts longer for four years. The expected cash flows after taxes for the two different types are as follows:
Machine
0
1
2
3
4
A
(10,000)
8,000
8,000
B
(12,000)
5,000
5,000
5,000
5,000
The cost of money of the firm is 10%.Analyze the two options and advise the company which one is better.
5. (NPV) State Electric wants to decide whether to repair or replace electric meters when they break down. A new meter cost $30 and, on the average, will operate for 12 years without repair. It costs $18 to repair a meter, and a repaired meter will, on average, operate for 8 years before it again needs a repair. Repairs can be made repeatedly to meters because they are essentially rebuilt each time they are repaired. It costs $6 to take out and reinstall a meter. The time value of money is 0.05. Should the company repair old meters or buy new meters?
New (A)
Old (B)
Cost
($30)
($18)
Repair and reinstall cost
($6)
($6)
Life of Meter
12 years
8 years
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