1) Bill has the chance to invest in a project that will generate year-end cash inflows of $1,500 each year for 2 yrs, $2,000 for each of the next 3 yrs, and $5,000 at the end of year 6. The required rate of return is 13.5% compounded annually. If the cost to invest in this project is $8,200, what is the Net Present Value of the project and should Bill accept the project?
2) After winning $1,000,000, Jill decides to make an endowment to the local school that will fund a scholarship of $8,000 every year for the next 30 yrs. The market interest rate for a deposit account that will disperse such an annuity is 9.5% compounded annually. What amount must Jill invest in this account today to fund this annuity for 30 yrs (the 30th payment will zero out the account)?
3) Tim has an investment budget of $25,000 available to acquire one of three mutually exclusive projects. The cost and projected cash flows for the three projects below:
Project 1 Project 2 Project 3
Project Initial Cost $20,000 $25,000 $20,000
Year 1 Cash Flow $15,000 $12,000 $10,000
Year 2 Cash Flow $5,000 $8,000 $8,000
Year 3 Cash Flow $5,000 $7,000 $6,000
Year 4 Cash Flow $6,000 $10,000 $5,000
Year 5 Cash Flow $1,000 $1,000 $3,000
1. What is the Payback Period for each project?
2. Assuming the projects are comparable in risk and therefore have the same discount rate of 12%, what is the Net Present Value for each project?
3. Which project, if any, should Tim accept and why?
The solution explains some questions in finance relating to time value of money and capital budgeting