Answers to selected problems from the text
p. 293 / problem 3
the PV(1 million oz of gold in 8 years) = $280*1mil = 280 mil
the price of gold in 8 years will be 280*1.055
8
= $429.71 per oz
p. 270 / problem 11
NPV
Piston
= $201
NPV
Turbo
= $319
this is the preferable plane
p. 270 / problem 10
a. the expected NPV is = 100 + 0.5*140 + 0.5*50 = 5 mil
do not build
b. now the expected NPV is = 100 + 0.5*140 + 0.5*90 = 15 mil
p. 239 / problem 2
a. r
nominal
= 0.06 + 0.9*0.08 = 0.132 (nominal rate)
(1+r
nominal
) = (1+r
real
)*(1+i);
then r
real
= 0.0885 (real rate)
b. r
proposed
= 0.2 + 0.0885 = 0.2885
NPV
1
= 10 mil + 3 mil / 1.2885 + 3 mil / 1.2885
2
+ … + 3 mil / 1.2885
10
= 425,800
NPV
2
= 10 mil + 2 mil / 1.2885 + 2 mil / 1.2885
2
+ … + 2 mil / 1.2885
15
= 3,222,300
c.
expected income from well 1: 0.2*0 + 0.8*3 = 2.4 mil
expected income from well 2: 0.2*0 + 0.8*2 = 1.6 mil
NPV
1
= 10 mil + 2.4 mil / 1.0885 + 2.4 mil / 1.0885
2
+ … + 2.4 mil / 1.0885
10
= 5,504,600
NPV
2
= 10 mil + 1.6 mil / 1.0885 + 1.6 mil / 1.0885
2
+ … + 1.6 mil / 1.0885
15
= 3,012,100
d. Yes there is. One can find it by solving for the discount rate when the discount value of the cash
flows is made equal to the NPV calculated in b. It will be unique since the project cash flows
change sign only once.
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p. 239 / problem 13
a. 20.5%;
NPV(project) = $3,093
b. CEQ
1
= 35.52;
CEQ
2
= 47.31;
CEQ
3
= 35.01;
c.
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 Spring '07
 DONCHEZ,RO
 Corporate Finance, Net Present Value

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