[1] For an investment of $15,000 now, a company can receive $9,250 one year from now, and $9,200 two years from now. Check its earnings rate on this deal by comparing it to an account using the following rates. For each part, fill out the following balance sheet
| Time (year) | Interest | Deposit | Withdrawal | Balance |
| 0 | $15,000 | $15,000 | ||
| 1 | ? | $9,250 | ? | |
| 2 | ? | 9,200 | ? |
(a) 10% effective
(b) 20% effective
(c) 15% effective
[2] For the investment in the previous problem, find the NPV at each of:
(a) 10% effective
(b) 20% effective
(c) 15% effective.
Relate each value to the results in (a), (b), and (c)
[3] A finance company has an opportunity to purchase three promissory notes from a broker for a total of $140,000 cash. The first note would pay $20,000 in one year, the second would pay $70,000 in two years, and the third $80,000 in three years. The finance company has set for itself a minimum acceptable rate of return of 10% effective.
(a) Evaluate the net present value of the investment at the company’s MARR.
(b) State your conclusion about the acceptability of the profitability of this deal.
[4] A project is to cost $60,000 immediately and to produce net cash inflows of $20,000 at the end of the first year, $30,000 at the end of the second year, and $25,000 at the end of the third year. At the end of the third year the business will be sold for $5,000. The company aims at a rate of return of 15% effective.
(a) Show whether or not the company will achieve its objective.
(b) Find the value of the bonus paid at the start, which would cause the project to earn exactly 20% effective.
[5] Samuels Co. plans to start a repair business. It would provide net returns of $35,000 at the end of the first year, and $50,000 at the end of each of the next three years. The equipment would then be sold for $11,000 and the business terminated. Samuels aims at a rate of return of 15%. How much should Samuels be willing to invest (now)?
[6] Williams Co. has the chance to start a transportation company in the north. It would require $108,000 to start the business, and it would provide net returns of $35,000 at the end of the first year, and $40,000 at the end of each of the next two years. The equipment would then be sold for $9,000 and the business terminated. Williams aims at a rate of return of 12%.
(a) Find the NPV at 12% effective, and the IRR. Should Williams Co. start this company?
(b) If the government wanted to subsidize Williams so that it would earn 15% compounded annually, what subsidy paid at the end of the three years would be required?
[7] PA Lumber Co. is bidding on the right to cut lumber from a private forest for 10 years. The amount of lumber permitted to be cut each year would allow PA to produce a net cash flow (excluding cost of cutting rights) of $120,000 a year. If PA aims at a rate of return of 12.5%, how much could it afford to bid as a lump sum for the cutting rights?
[8] Iffi Co. plans to install insulation in a building that it plans to use for six years. The insulation and its installation will cost $193,000 and will result in savings of $37,000 a year, and will increase the residual value of the building by $90,000. Find the internal rate of return of the planned installation of the insulation.
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