MIT Sloan School of Management
J. Wang
15.407
E52456
Fall 2003
Problem Set 1: Present Value
Due: September 23, 2003
1.
(BM) A factory costs $800,000. You reckon that it will produce an inﬂow after operating
costs of $170,000 a year for 10 years. The opportunity cost of capital is 14%,
(a) what is the NPV of the factory?
(b) What will the factory be worth at the end of ﬁve years?
2.
(BM) Siegfried Basset is 65 years of age and has a life expectancy of 12 years. He wishes
to invest $20,000 in an annuity that will make a level payment at the end of each of the
next 12 years. If the interest rate is 8%, what income can Mr. Basset expect to receive
each year?
3.
(BM) An oil well now produces 100,000 barrels per year. The well will produce for 18
years more, but production will decline by 4% per year. Oil prices, however, will increase
by 2% per year. The discount rate is 8%. What is the PV of the well’s production if
today’s price of oil is $14 per barrel?
4.
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 Fall '03
 Wang
 Inflation, United States dollar, Pound sterling, MIT Sloan School of Management

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