1. The prevailing discount rate is 15% per annum. Firms live for three years. Firm F’s cash flows start with $500 in year 1 and grow at 20% per annum for two years. Firm S’s cash flows also start with $500 in year 1 but shrink at 20% per annum for two years. What are e the prices of these two firms? Which one is the better “buy”?
2. A project has the cashflows in periods 1 through 4: -$200, +$200, -$200, +200. If the prevailing interest rate is 3%, would you accept this project if you were offered an upfront payment of $10 to do so?