Victor Partman
Week 3 Problem Set
Answer the following questions and solve the following problems in the space provided. When you
are done, save the file in the format flastname_Week_3_Problem_Set.docx, where flastname is your
first initial and you last name, and submit it to the appropriate dropbox.
Chapter 7 (pages 225–228):
1. Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a
year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you
undertake the investment opportunity? Calculate the IRR and use it to determine the maximum
deviation allowable in the cost of capital estimate to leave the decision unchanged.
NPV = 12000/1.1 – 10000=909.09. Thus, he should take it.
IRR = 12000/10000 – 1 = 20%
The cost of capital can increase by up to 10% without changing the decision
8. You are considering an investment in a clothes distributor. The company needs $100,000 today
and expects to repay you $120,000 in a year from now. What is the IRR of this investment
opportunity? Given the riskiness of the investment opportunity, your cost of capital is 20%. What
does the IRR rule say about whether you should invest?
IRR = 120000/100000 – 1 = 20%. You are indifferent
19. You are a real estate agent thinking of placing a sign advertising your services at a local bus
stop. The sign will cost $5,000 and will be posted for one year. You expect that it will generate
additional revenue of $500 per month. What is the payback period?
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- Spring '10
- Unknown
- Finance, IRR rule, Pisa Pizza, new pizza
