Solutions for LN1_ProblemSet
(If there are slight discrepancies with your solutions due to rounding errors, dont
worry.)
Question 1.
75,000 x AF(20yrs, 8%) = 75,000 x 9.818 = 736,350.
Question 2.
(a) Y x (1.06)5 = 22,000. Y =16,439.68.
(b) 15,000 x AF(4yr

1. An oil well will produce 100,000 barrels of oil by the end of this year, but production
will decline by 4% per year after that. The price of oil at the end of this year will be
$14/barrel. Assume all cash flows occur at the end of each year. The discou

Practice Midterm
Question 1
You are thinking of building a new machine that will save you $1,000 on the first year. The
machine will then begin to wear out so that the savings decline at a rate of 2% per year forever.
What is the present value of the savi

1. Donald Trumpet, a real estate developer, has to decide on the optimal height of an
apartment building. It will have a minimum of 4 floors. Each additional floor requires an
investment of $1 million. The perpetual free cash flows X(I) generated by the b

1. Donald Trumpet, a real estate developer, has to decide on the optimal height of an
apartment building. It will have a minimum of 4 floors. Each additional floor requires an
investment of $1 million. The perpetual free cash flows X(I) generated by the b

Practice Midterm
Question 1
You are thinking of building a new machine that will save you $1,000 on the first year. The
machine will then begin to wear out so that the savings decline at a rate of 2% per year forever.
What is the present value of the savi

1. An oil well will produce 100,000 barrels of oil by the end of this year, but production
will decline by 4% per year after that. The price of oil at the end of this year will be
$14/barrel. Assume all cash flows occur at the end of each year. The discou

Problem Set LN1
Question 1.
You win a lottery that pays 20 equal annual installments adding up to $1.5
million. The first payment is next year. How much is the prize really worth? The
discount rate is 8 %.
Question 2.
(a) The cost of a new automobile is $

Solutions additional problems LN4
Problem 1
Using the above financial statement, answer the following questions which will help you work
through a FCF calculation.
1. What was the firms effective tax rate in Year 1?
70/175 = 40%
2. What were the earnings

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