Discounted Cash Flows

A. choose between a perpetuity of $45,000/year inflating at 2%/year and a lump sum payment of $1,255,000. Use a 5.5% discount rate. Use the box to explain your choice.

B. run NPVs and IRRs for three airplane fuel pumps. Use a 12% discount rate: Pump A costs $35,000 and saves the firm $5,000 each year for years 1-15 Pump B costs $35,000 and saves the firm $4,500 each year for ever Pump C costs $35,000 and saves $4,000 in year 1; this saving continues for ever, increasing 4% per year

C. provide a 25% guaranteed cash flow IRR to an airline flying to your airport. The airline's cash flows are minus $1 million at the start and positive $371,739 each year for years 1-4. Calculate the subsidy to be paid at the start. Explain your answer in the box provided.

D. calculate the implicit interest rate (IRR) of a computer lease. The computers cost $30,000 at the start and pay a yearly lease of $12,000 for years 1-3. The salvage value is $1,000 at the end of year 4. Explain your answer in the box provided. If the firm can borrow at 8.5% from the bank, should it borrow from the bank or lease?

Weismann Co. issued 14-year bonds a year ago at a coupon rate of 10 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 9 percent, what is the current bond price?

1) The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 6.6420% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now?

2) Recall that on a one-year Treasury security the yield is 4.9200% and 6.6420% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.35%. What is the market’s estimate of the one-year Treasury rate one year from now?

3) Suppose the yield on a two-year Treasury security is 4.0%, and the yield on a five-year Treasury security is 5.7%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now?

Suppose that Ramos contributes $6000/year into a traditional IRA earning interest at the rate of 4%/year compounded annually, every year after age 35 until his retirement at age 65. At the same time, his wife Vanessa deposits $4700/year into a Roth IRA earning interest at the same rate as that of Ramos and also for a period of 30 years. Suppose that the investments of both Ramos and Vanessa are in a marginal tax bracket of 35% at the time of their retirement and that they both wish to withdraw all of the money in their IRAs at that time.

(a) After all due taxes are paid, who will have the larger amount?

RamosVanessa   

(b) How much larger will that amount be? (Round your answer to the nearest cent.)
$

required rate of return = 15%

year

using excel, draw npv profile and find "two" IRRs.

There should be two IRRs. If you get two IRRs, the NPV profile graph should look like a parabola curve.

I figured out the first IRR which is 19% (19.45...% to be exact) but I can't seem to get the second one.

Mr. C is a 22 year old, white, single, male who is in his third year at a local university in Albuquerque, New Mexico. He is majoring in Philosophy and American studies. When he is not in school he lives with his parents.

He has been taken to the mental health center for an evaluation today, brought by his parents who were concerned after he was demonstrating “strange” behaviors and then abruptly dropped out of school after he failed his summer class. This baffled the parents since he has always been an A and B student. Up until three months ago he seemed to be doing okay. He was living in the dorms and there were no reports he was doing poorly. When asked why he dropped out of school, he stated the administration of the school was watching and targeting him for being a suspected spy for another university.

He stated the professor of his philosophy class warned him of this in a coded message on one of his powerpoints. None of the other students noticed this, but the message was clear to him. He also verbalized he could hear the students laugh at him behind his back. Additionally, he began hearing two voices, which he did not recognize. These voices would comment on his behavior and criticize his actions. They were telling him to drop out of school because if he didn’t the administration was going to make a public spectacle of him.

He stated he smoked a little bit of pot when he was in high school, but didn’t like it because it made him feel weird. He also didn’t like the taste of alcohol. He grew up in an upper middle class environment. His mother is an attorney working in real estate law and his father is a professor in the English department of another university in New Mexico. They stated he has always been very intelligent and always a little shy, but not overly so. He spent a lot of time alone, but his parents didn’t consider him to be a “loner” since he occasionally had one or two friends. He didn’t like to go to parties or places where there were large gatherings. The parents did not see this as odd and were glad he was keeping away from trouble. He joined a couple of youth groups in his adolescence which were tied to his church, but dropped out after he felt they were pressuring him to change his beliefs.

When the social worker entered the room to begin the evaluation, Mr. C asked her if she worked for the administration and asked to see her credentials. He was disheveled in appearance, wearing a dirty wrinkled shirt--which was different from his past habits, according to the parents. He always prided himself on being clean and neat. He was slightly agitated and during the interview got up from his chair several times. His thinking, at times, was tangential with some loosening of associations. He denied any suicidal or homicidal ideation. His only previous psychiatric history was outpatient treatment he attended with his family in a family therapy session. This occurred when he was around 15 y.o. when his parents were thinking of getting a divorce. The parents did not divorce and have remained together. The father did state one of his brothers was hospitalized for psychiatric reasons in Colorado several years ago, and didn’t know the circumstances.

Based on the above vignette for Case #1, list the principal diagnosis/diagnoses (including any and all appropriate subtypes and specifiers)

An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $7,200,000 and will be sold for $1,620,000 at the end of the project.

A) What is the book value of the equipment at the end of Year 4?

B) If the tax rate is 24 percent, what is the aftertax salvage value of the asset?

required rate of return = 15%

year

1. make a spreadsheet using excel to calculate irr, mirr, npv,

2. using excel, draw npv profile and find "two" IRRs.

3. based on the analysis, should you take on this project?

Colsen Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

The company has a 40% tax rate, and its WACC is 13%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $  
2. 
   
3. If this project would cannibalize other projects by $0.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
   The firm's OCF would now be $  
4. 
   
5. Ignore Part b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar.
   The firm's operating cash flow would -Select-increase/decrease by $