1. A company purchased equipment for a project. The useful life of the project is 7 years. It has been estimated that each year-end, the project is going to generate a net cash inflow of $50,000. The resale value of the equipment is zero. The discount rate is 16% and the IRR of the project is 20%. What is the initial cost of the equipment?
a. $180,250
b. $300,000
c. $200,000
d. $150,000
2. You are considering purchasing an investment product that makes 100 annual payments. The first payment is $100 and occurs two years from today. After that the payment amount grows at 7% per year. If the prevailing market interest rate is 4%, what is the highest price you’d be willing to pay for the product?
a. Any price. Since the growth rate is greater than the interest rate the investment product has infinite value.
b. $2,933.64
c. $51,861.60
d. $347,667.02