S07Assg5soln

S07Assg5soln - FIN 2200 CORPORATION FINANCE Sum /2007...

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FIN 2200 – CORPORATION FINANCE Sum /2007 Assignment #5 key Professors: A. Dua 1. Suppose the nominal discount rate is 10.21% and the expected inflation rate is 3%. Consider a 10-payment annuity of $120,000 (real cash flow) per year with the first payment due in one year’s time. a) Determine the NPV of the annuity using the regular annuity formula and real amounts. real interest rate 07 . 1 03 . 1 1021 . 1 = - = or 7% - = 10 ) 07 . 1 ( 1 1 07 . 000 , 120 PV $842,829.78 b) Show how to get the same result with the growing annuity formula and nominal amounts. - - = 10 1021 . 1 03 . 1 1 03 . 1021 . 0 ) 03 . 1 ( 000 , 120 PV $842,829.78 2. Suppose the expected real discount rate is 7% and the expected inflation rate is 4%. Consider a 12-payment annuity of $160,000 (nominal cash flow) per year with the first payment due in one year’s time. a) Determine the NPV of the annuity using the regular annuity formula and nominal amounts. nominal interest rate = [(1.07)(1.04)] – 1 = 0.1128 - = 12 ) 1128 . 1 ( 1 1 1128 . 000 , 160 PV $1,025,065.87 b) Show how to get the same result with the growing annuity formula and real amounts. (Note: The growth rate is not –4%) 03846154 . 0 1 04 . 1 1 g - = - = - - - - = 12 07 . 1 03846154 . 1 1 ) 03846154 . ( 07 . 0 04 . 1 000 , 160 PV $1,025,065.87
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FIN 2200 – CORPORATION FINANCE Page 2 of 4 Assignment #5 key Professors: A. Dua, J. Falk, A. Paseka, R. Scott 3. The Churchill Bay Mining Company Inc. (CBMC) is considering a project to bring the proposed “Chaparral II” mine into production phase. The CBMC currently has a 5-year
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S07Assg5soln - FIN 2200 CORPORATION FINANCE Sum /2007...

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