Question 1: Present Values

Your firm’s geologists have discovered a small oil field in New York’s Westchester County. The field is forecasted to produce a cash flow of C 1 = $2 million in the first year. You estimate that you could earn an expected return of r = 12% from investing in stocks with a similar degree of risk to your oil field. Therefore, 12% is the opportunity cost of capital. What is the present value? The answer, of course, depends on what happens to the cash flows after the first year.

Calculate present value for the following cases:

The cash flows are forecasted to continue forever, with no expected growth or decline.

The cash flows are forecasted to continue for 20 years only, with no expected growth or decline during that period.

The cash flows are forecasted to continue forever, increasing by 3% per year because of inflation.

The cash flows are forecasted to continue for 20 years only, increasing by 3% per year because of inflation.

Question 2: Continuous Compounding

How much will you have at the end of 20 years if you invest $100 today at 15% annually compounded? How much will you have if you invest at 15% continuously compounded?

Question 3: IRR Rule

Cash Flows ($ thousands)

Project

C0

C1

C2

C3

A

-100

+60

+60

0

B

-100

0

0

+140

Calculate the NPV of each project for discount rates of 0%, 10%, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis.

What is the approximate IRR for each project?

In what circumstances should the company accept project A?

Calculate the NPV of the incremental investment (B- A) for discount rates of 0%, 10%, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.

Question 4: Capital Rationing

Suppose you have the following investment opportunities, but only $90,000 available for investment. Which projects should you take?

Project

NPV

Investment

1

5,000

10,000

2

5,000

5,000

3

10,000

90,000

4

15,000

60,000

5

15,000

75,000

6

3,000

15,000

Internal

Internal

The price is based on these factors:

Academic level

Number of pages

Urgency

Basic features

- Free title page and bibliography
- Unlimited revisions
- Plagiarism-free guarantee
- Money-back guarantee
- 24/7 support

On-demand options

- Writer’s samples
- Part-by-part delivery
- Overnight delivery
- Copies of used sources
- Expert Proofreading

Paper format

- 275 words per page
- 12 pt Arial/Times New Roman
- Double line spacing
- Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Delivering a high-quality product at a reasonable price is not enough anymore.

That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more