173MTW06 - Economics 173 Corporate Finance Prof Garey Ramey...

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Economics 173 – Corporate Finance Winter 2005-06 Prof. Garey Ramey Midterm Exam Question 1. Calculate the PV of the following cash flow streams at the given discount rates: a. $100,000 received 10 years from now, followed by cash flows of $100,000 per year for the next six years, discount rate 6%. b. $25,000 one quarter from now, followed by quarterly cash flows that rise by 2% per quarter for the next 15 quarters, discount rate 13% per year. c. Suppose you must invest $300,000 now to obtain the cash flow stream in part a. Is the IRR of this investment greater than or less than 6%? Question 2. Your company is purchasing a new earth mover at a cost of $500,000. This equipment will be operated for five years and then sold for 10% of the original purchase price. The investment will be depreciated straight-line to an ending book value of $25,000. The tax rate is 35%. a. Suppose projected inflation is zero and the OCC is 7%. What is the cost of this purchase in PV terms? b. Suppose projected inflation is 5% and the OCC is 12%.
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