You want to start saving for your son’s college education. You will need $65,000 in 18 years. You can earn 10% compounded annually. How much do you need to invest today?
a. $2,828.18
b. $9,763.07
c. $11,690.82
d. $13,258.17
e. $30,322.98
Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $95,000 and will generate net cash inflows of $20,000 per year for 11 years.
a. What is the project’s NPV using a discount rate of 9%? Should the project be accepted? Why or why not?
b. What is the project’s NPV using a discount rate of 14%? Should the project be accepted? Why or why not?
c. What is this project’s internal rate of return? Should the project be accepted? Why or why not?
A firm evaluates all of its projects by using the NPV decision rule.
| Year | Cash flow |
| 0 | $28,000 |
| 1 | 20,000 |
| 2 | 12,000 |
| 3 | 5,000 |
Required:
(a) At a required return of 27 percent, what is the NPV for this project?
(b) At a required return of 39 percent, what is the NPV for this project?
You have just won the lottery and have been offered two options in receiving your payment:
1. Receive $50,000 today.
2. Receive $10,000 at the end of each of the next ten years.
Assuming an appropriate interest rate of 7%, Which option would you choose and why?
