FIN515_W3_Problem_Set_Solutions (1) - Chapter 7 7-1 Your brother wants to borrow \$10,000 from you He has offered to pay you back \$12,000 in a year If

# FIN515_W3_Problem_Set_Solutions (1) - Chapter 7 7-1 Your...

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Chapter 7 7-1.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. 7-8.You are considering an investment in a clothes distributor. The company needs \$100,000 todayand 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 doesthe IRR rule say about whether you should invest? 7-19.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 1 year. You expect that it will generate additional revenue of \$500 per month. What is the payback period?

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