1. Assume the following:
You buy some equipment today for $100 to produce and sell balloons.
you invest $25 in working capital today to support your sales efforts.
The business produces after tax cash flow of $30 per year for 5 years. All cash flows occur on the last day of the year.
You close the business at the end of 5 years and sell the equipment for $50 (it had been depreciated to $20; your tax rate is 33.33%)
You liquidate the working capital at the end of the first year as well.
Assume a 10% discount rate
Is this a good project? What is the present value of all of the combined cash flows?
A) No. negative $10
B) yes. $14
C) Yes. $25
D) yes. $29
E) Yes. $35
2. Consider the following project. You invest $675 in an equipment project that earns you $100 in cash flows for five years. At the end of five years, you sell the equipment for $500. Assume a cost of capital of 10%. Assume a 0% tax rate. Assume the 10 year Treasury rate is 3%.
Do not invest because the NPV is negative
Invest because the positive cash flows exceed the total relevent costs
Invest because the project has a positive NPV of around $15
Invest because the project has an IRR of 20% which is above your cost of capital
3. You receive a $35,000 car loan at 6% nominal annual for 60 months. Interest is compounded daily and you make monthly payments. How much PRINCIPLE do you pay on your 12th payment?