Question

4-A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75%?

5-What is the net present value of a project that has an initial cash outflow of $-11,500, at time 0, and the following cash flows for years 1-4? The required return is 10.0%.

                                                Year     Cash Flows

                                                   1          $-1,500

                                                   2          $11,000

                                                   3          $11,000

                                                   4          $11,000

6--What would you pay for a stock which just paid a dividend of $1.70 if the expected dividend growth rate is 4% and you require a 10% return on your investment?

Answer 1

4

Discount rate	13.7500%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(10,600.00)	0	(10,600.00)	(10,600.00)
1,750.000	1	1,538.46	(9,061.54)
1,750.000	2	1,352.49	(7,709.04)
1,750.000	3	1,189.01	(6,520.04)
1,750.000	4	1,045.28	(5,474.76)
8,500.000	5	4,463.36	(1,011.40)

NPV = 1,011.40

5

Discount rate	10.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(11,500.00)	0	(11,500.00)	(11,500.00)
(1,500.000)	1	(1,363.64)	(12,863.64)
11,000.000	2	9,090.91	(3,772.73)
11,000.000	3	8,264.46	4,491.74
11,000.000	4	7,513.15	12,004.88

NPV = 12,004.88

6. price = 1.70*1.04/(0.10 - 0.04) = 29.47