Your agency is competing with another agency for $15 million in government money. Only one of you will get the $15 million. Your agency will use the $15 million for vocational training that will increase the skills and earning power of 100 people in about two years when they finish the program. The other agency will use the $15 million to study how floods affect homeowners insurance costs. Their study will take four years but it will create twice as much value as your agencys project at the end of that time. The government uses a 4 percent discount rate for both projects. Who will get the $15 million?

Calculate the Net Present Value of a project that has upfront costs of $124,000 and end-of-year annual cash flows of $30,000 for five years, if the appropriate discount rate is 6.5 percent. Suppose that discount rate is the borrowing cost for the project. Show that this projects cash flows can pay off a loan with an annual interest rate of 6.5 percent over the next five years.

Would you suggest your firm invest in a new machine that costs $450,000 and generates cash flows of $60,000 per year at the end of each of the next ten years if the appropriate discount rate for the machine is 8 percent? What is the present value of the annuity generated by this machines cash flows?

Calculate the internal rate of return for a project that has upfront costs of $6 million and cash flows of $2 million per year for each of the next four years. Suppose the risk adjusted borrowing cost of this project is 15 per-cent. Using IRR analysis, would you undertake this project? Confirm your answer by calculating the projects NPV.