S07Assg5

S07Assg5 - FIN 2200 CORPORATION FINANCE Sum 2007...

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FIN 2200 – CORPORATION FINANCE Sum 2007 Assignment #5 Professors: A. Dua NOT to be handed in! 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. b) Show how to get the same result with the growing annuity formula and nominal amounts. 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. b) Show how to get the same result with the growing annuity formula and real amounts. (Note: The growth rate is not –4%) 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 lease commitment for the land with the Province of Manitoba. If Chaparral II is accepted it will start immediately and continue for the next five years. Assume that the after-tax cost of capital is 15% per year (effective) and that the applicable corporate tax rate is 36%. a)
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This note was uploaded on 04/06/2010 for the course ECON 2342 taught by Professor James during the Three '09 term at ADFA.

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S07Assg5 - FIN 2200 CORPORATION FINANCE Sum 2007...

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