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03-PS1-PV

# 03-PS1-PV - MIT Sloan School of Management J Wang E52-456...

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MIT Sloan School of Management J. Wang 15.407 E52-456 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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03-PS1-PV - MIT Sloan School of Management J Wang E52-456...

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