Homework 7_with_POST.docx

Homework 7_with_POST.docx - Homework 7(Chp 6 NPV Decision...

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Homework 7 (Chp 6 NPV Decision criteria and Chp 7 risk and return) due before 10/27/2017 5:00 pm Please show all your work to receive full credit. Problem 1 (covering chapter 6) : Air conditioning for a college dormitory will cost $1.5 million to install and $200,000 per year to operate. The system should last 25 years. The real cost of capital is 5%, and the college pays no taxes. What is the equivalent annual cost? Problem 2 (covering chapter 6): The Company A is thinking of a new project that is expected to have following income statement projections for next 3 years (year 1, 2 and 3 is same). In year 0 the project requires an initial investment of $90,000, which will be depreciated using straight line depreciation to $0 over 3 years. Assume working capital changes of 0 . Assume after-tax salvage value of $20,000.
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