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Economics 173 – Corporate Finance
Winter 200506
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 straightline 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.
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This note was uploaded on 05/16/2008 for the course ECON 173 taught by Professor Ramey during the Winter '08 term at UCSD.
 Winter '08
 ramey
 Economics

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