# Net present value of annuities

1. What is the present value of the following annuities?

a. $2,500 a year for 10 years discounted back to the present at 7 percent

b. $70 a year for 3 years discounted back to the present at 3 percent

2. Napa Valley Winery (NVW) is a boutique winery that produces a high-quality, nonalcoholic red wine from organically grown cabernet sauvignon grapes. It sells each bottle for $30. NVW's chief financial officer, Jackie Cheng, has estimated variable costs to be 70 percent of sales. If NVW's fixed costs are $360,000, how many bottles of its wine must NVW sell to break even?

3. Fijisawa, Inc., is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay associated with the expansion would be $1,950,000, and the project would generate free cash flows of $450,000 per year for six years. The appropriate required rate of return is 9 percent.

a. Calculate the net present value.

b. Calculate the profitability index.

c. Calculate the internal rate of return.

d. Should this project be accepted?

4. Assuming a 360-day year, calculate what the average investment in inventory would be for a firm, given the following information in each case:

a. The firm has a cost of goods sold figure of $480,000 and an average age of inventory of 40 days.

b. The firm has a cost of goods sold figure of $1,150,000 and an inventory turnover ratio of 5.

5. Salte Corporation is issuing new common stock at a market price of $27. Dividends last year were $1.45 and are expected to grow at an annual rate of 6 percent forever. Flotation costs will be 6 percent of market price. What is Salte's cost of equity?

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#### Solution Summary

The net present value of annuities are determined. Break-even points are analyzed.