Question

Please answer them correctly. Here are 2 short problems. Please solve all 2 problems. I would really appreciate your effort. Thanks.

1). You are buying a sofa. You will pay $200 today and make three consecutive annual payments of $300 in the future. The real rate of return is 17.0 percent, and the expected inflation rate is 4 percent. What is the actual price of the sofa? (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)

Actual Price $________?

2). Sunland, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $27,000, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Sunland will recover these changes in working capital at the end of the project 8 years later. Assume the appropriate discount rate is 9 percent. What are the present values of the relevant investment cash flows? (Do not round intermediate calculations. Round answer to 2 decimal places, e.g. 15.25.)

Present Value $__________?

Answer 1

1

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.17=((1+Nominal return)/(1+0.04)-1)*100

Nominal return = 21.68

Sofa
Discount rate	0.2168
Year	0	1	2	3
Cash flow stream	-200	300	300	300
Discounting factor	1	1.2168	1.480602	1.801597
Discounted cash flows project	-200	246.5483	202.6203	166.5189
NPV = Sum of discounted cash flows
NPV Sofa =	415.69 = price
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

2

Increase in working cap = cash+inventories+accnt receivables-accnt payables

=10000+27000+25000-5000=57000

Working capital
Discount rate	0.09
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-57000	0	0	0	0	0	0	0	57000
Discounting factor	1	1.09	1.1881	1.295029	1.4115816	1.538624	1.6771	1.828039	1.992563
Discounted cash flows project	-57000	0	0	0	0	0	0	0	28606.38
NPV = Sum of discounted cash flows
NPV Working capital =	-28393.62
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor