The points for each question are listed in earnestness at the start of the question, and the total points for the entire assignment adds up to 100. Question 1 (5 points) Caching has asked his flat mate Jason for a $500 loan to cover a portion of his rent and utility costs. Caching proposes repaying the loan with $300 from each of his next two financial aid disbursements, the first 4 months from now and the second 12 months from now. Season’s alternative is to earn 5% annually In his money market account. Assume there is no risk of default, and that compounding is monthly.

What is the NP of the loan? (Enter Just the number without the $ sign or a comma; round if decimals. ) You entered: 80 Your Answer 80 Total 0 score 5. 00 5. 00 / 5. 00 Explanation Correct. You know compounding and figuring out NP. HTTPS://class. Coursers. Org/interference-003/quiz/feedback? Submission_id=41317 PГGina 1 De 9 Question Explanation This Is a simple NP problem, where the loan Is positive NP only because Caching cannot borrow at market rates, (5 points) Juanita has an opportunity to invest in her friend’s clothing store.

The initial investment is $10,000 and her expected scofflaws are as follows: Year 1: $300 Year 2: $500 year 3: $1200 year 4: $2000 year 5: $2000 year 6: $5000 year 7: $5000 What Junta’s AIR on this investment? (No more than two decimals in the percentage interest rate, but do not enter the % sign. ) You entered: 9. 12 Your Answer 9. 12 Total 0 Explanation Correct. This is where a spreadsheet comes in handy. Question Explanation This is a simple AIR calculation. Drawing a time line helps. Question 3 (5 points) Fabrics is looking to buy a new plug-in hybrid vehicle. The purchase price is $12,000 more than a similar conventional model.

However, he will receive a $7,500 federal tax credit that he will realize at the end of the year. He estimates that he will eave $1,200 per year in gas over the conventional model; these cash outflows can be assumed to occur at the end of the year. HTTPS://class. Coursers. Org/interference-003/ PГGina 2 De 9 The cost of capital (or interest rate) for Fabrics is 6%. How long will Fabrics have to own the vehicle to Justify the additional expense over the conventional model? ( I. E, What is the DISCOUNTED payback period in years? Discount future cash flows before calculating payback and round to a whole year. You entered: 5 Your Answer 5 0 Score Explanation 5. 00 Correct. You discounted before calculating payback, but it still is a very myopic measure. Total Question Explanation Simple payback calculation, but with discounting. Question 4 (10 points) When Seen operates an ice cream shop. He is trying to decide whether to expand his business to include ice cream cakes. He will need some additional space that will cost him $7,200 per year at the end of each year and some additional equipment that will cost $10,000 up front. The ice cream cakes will provide an extra income of $10,000 per year at the end of each year.

The business is expected to last 20 years. The discount rate (or interest rate) for When Sense’s new business is 10%. What is the Net Present Value of the ice cream cake project project? Assume there are no taxes. ) Your Answer 12435 HTTPS://class. Coursers. Org/interference-003/quiz/ feedback? Submission_id=41317 PГGina 3 De 9 13838 14742 12898 Total 10. 00 Correct. You know how to set up and calculate NP. 10. 00 / 10. 00 Question Explanation A fairly common NP problem Question 5 (10 points) Hussein is looking to refinance his home because rates have gone down from when he bought his house 10 years ago.

He started with a 30-year fixed-rate mortgage of $288,000 at an annual rate of 6. 5%. He can now get a 20-year fixed-rate mortgage at an annual rate of 5. 5% on the remaining balance of his initial mortgage. All loans require monthly payments. ) In order to re-balance, Hussein will need to pay closing costs of $3,500. These costs are out of pocket and cannot be rolled into the new mortgage. How much will refinancing save Hussein? (I. E. What is the NP of the refinancing decision? ) Your Answer 15463 16975 0 10. 00 Correct.

This is a very PГGina 4 De 9 Question Explanation A problem we saw last week, but I expect you to do this routinely now. It is a value generating opportunity through financing only because interest rates changed. Question 6 (10 points) Chancre has the opportunity to buy a vacant lot next to several immemorial properties for $50,000. She plans to buy the property and spend another $60,000 immediately to put in a parking lot. She has talked to the local businesses and has some contracts lined up to fill the parking spaces. The profits from the contracts will provide $25,000 per year and the contracts will last 10 years.

What is the NP of Chancre’s plan if the appropriate discount/interest rate is 10%? (Enter Just the number without the $ sign or a comma; round off decimals. ) You entered: 43614 Your Answer 43614 Total score 10. 00 10. 00 / 10. 00 Explanation Correct. You know how to calculate WV’. Question Explanation A standard NP problem. Question 7 (10 points) This question introduces you to the concept of an annuity with growth. The formula is given on p. 3, equation (7), of the Note on Formulae, but I would encourage you to try doing it in HTTPS://class. Coursers. Org/interference-003/quiz/ PГGina 5 De 9 Excel as well. If the first cash flow is C, the next one will be C(l+g), and so on, where g is the growth rate in cash flow). As an example, the present value of an annuity that starts one year from now at $100, and grows at 5%, with the last cash flow in year 10, using both the formula and excel. What is the NP of of a new manufacturing project that costs $100,000 today, but has a cash flow of $15,000 in year 1 that grows at 4% per year till year 12? Similar investments earn 7. 5% per year. (Enter Just the number without the $ sign or a comma; round off decimals. ) You entered: 40486 Your Answer 40486 Total Explanation Correct.

Hope you used both methods. Question Explanation This is a set up and calculation problem, nothing new conceptually. Question 8 (1 5 points) Diane has Just 18 and also completed high school and is wondering about the value of a college education. She is pretty good with numbers, and driven by uncial considerations only, so she sits down to calculate whether it is worth the large sum of money. She knows that her first year tuition will be $12,000, due at the beginning of the year (that is, right away). Based on historical trends she estimates that tuition will rise at 6% per year for the 4 years she is in school.