Problem 1. Starlight, Inc. must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.
Asset A Asset B
Rate of Return Probability Rate of Return Probability
8% 40% 7% 30%
13% 50% 17% 50%
18% 10% 27% 20%
For each project compute: The expected rate of return.
Problem 2. The Happy Puppy Company has compiled the following data for adding a new line of pets to their stores. What is the net present value of the investment? The initial investment in the project is $48,000. The firm's cost of capital is 12%, however projects in this risk class have a 14% required rate of return. The risk-free rate is 8%.
Year Cash Inflow
1 $23,000
2 19,000
3 15,000
4 13,000
5 $12,000
Problem 3) If you want to have $750,000 for retirement in 20 years and have only $100,000 saved today, how much do you need to put away at the end of each year until retirement if your assets can earn 8% per year?