PRESENT VALUE ANALYSIS TO COMPARE ALTERNATIVES -
(a) Your agency is competing with another agency for $10 million in government money. Only one of you will get the $10 million. Your agency will use the $10 million for college scholarships that will increase the knowledge and earning power of 100 people in about four years when they finish college. The other agency will use the $10 million to study how earthquakes affect home prices. Their study will take ten years but it will create twice as much value as your agency's project at the end of that time. The government uses a 3 percent discount rate for both projects. Who will get the $10 million? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).
NET PRESENT VALUE OF AN ANNUITY -
(b) Would you suggest your firm invest in a new machine that costs $450,000 and generates cash flows of $60,000 per year at the end of the next ten years if the appropriate discount rate for the machine is 8 percent? What is the present value of the annuity generated by this machine's cash flows? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).
(c) Would you suggest your firm invest in a new machine that costs $580,000 and generates cash flows of $75,000 per year at the end of each of the next ten years if the appropraite discount rate for the machine is 10 percent? What is the present value of the annuity generated by this machine's cash flows? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).
INTERNAL RATE OF RETURN -
(d) Calculate the internal rate of return for a project that has upfront cost of $6 million and cash flows of $2 million per year for each of the next four years. Suppose the risk adjusted borrowing cost of this project is 15 percent. Using IRR (Internal Rate of Return) analysis, would you undertake this project? Confirm your answer by calculating the project's NPV (Net Present Value). (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).