Topic 5 Warm Up Problems with Solutions

# Topic 5 Warm Up Problems with Solutions - Warm up Problems...

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Warm up Problems for Topic 5 (Capital Budgeting) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. Company A is considering a new piece of equipment. It will cost \$6,000 and will produce cash flows of \$1,000 every year for the next 12 years (the first cash flow will be exactly one year from today). Cash Flows look like the following: Y e a r 0 1 2 3 4 5 6 7 8 9 10 11 12 (6,000) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1a) What is the NPV if the appropriate discount rate is 10%? You can either discount each individual cash flow, or recognize that the \$1000 cash flows are just a twelve year annuity. So, PV=a/i [1-1/(1+i) N ] PV=1000/.1 [1-1/(1.1) 12 ] PV=\$6814 Adding this to the original investment gives an NPV of NPV=\$6814-\$6000 NPV=\$814 1b) What is the NPV if the appropriate discount rate is 12%? PV=1000/.12 [1-1/(1.12)

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Topic 5 Warm Up Problems with Solutions - Warm up Problems...

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