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 ayear. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should youundertake the investment opportunity? Calculate the IRR and use it to determine themaximumdeviation allowable in the cost of capital estimate to leave the decision unchanged.
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?
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- Spring '10
- Unknown
- Finance, Depreciation, Net Present Value, investment opportunity, Pisa Pizza, new pizza
