Suppose you just inherited a gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:
Year 1: $42,000,000
Year 2: $62,000,000
Year 3: $99,000,000
Compute the present value of this stream of income at a discount rate of 8%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this oil well at a 8% discount rate but you have to show how you got to this number.
Now compute the present value of the income stream from the gold mine at a discount rate of 6%, and at a discount rate of 4%. Compare the present values of the income stream under the three discount rates.

Suppose you just inherited a gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:
Year 1: $42,000,000
Year 2: $62,000,000
Year 3: $99,000,000

Compute the present value of this stream of income at a discount rate of 8%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this ...

Solution Summary

Computes the present value of a stream of income and compares the present values of the income stream under three discount rates.

Consider a project with the following expected cash flows:
Year Cash flow
0 - $400,000
1 $100,000
2 $120,000
3 $850,000
If the discountrate is 0%, what is the project's net presentvalue?
If the discount

6.1 You and your friends are thinking about starting a motorcycle company named Apple Valley Choppers. Your initial investment would be $500,000 for depreciable equipment, which should last 5 years, and your tax rate would be 40%. You could sell a chopper for $10,000, assuming your average variable cost per chopper is $3000, and

1. Which of the following are real assets, and which are financial?
Assets
a. A share of stock.
b. A personal IOU.
c. A trademark.
d. A factory.
e. Undeveloped land.
f. The balance in the firm's checking account.
g. An experienced and hardworking sales force.
h. A corporate bond.
2. At an interest rate of 12

You invest $1,000 today and expect to sell your investment for $2,000 in 10 years.
a. Is this a good deal if the discountrate is 6%?
b. What if the discountrate is 10%?
Show your solutions.

Cellular Systems paid a $3 dividend last year. The dividend is expected to grow at a constant rate of 5 percent over the next two years. The required rate of return is 12 percent (this will also serve as the discountrate in this problem). Round all values to three places to the right of the decimal point where appropriate.

Part 1. Capital Budgeting Practice Problems
a. Consider the project with the following expected cash flows:
Year Cash flow
0 - $500,000
1 $100,000
2 $110,000
3 $550,000
If the discountrate is 0%, what is the project's net

A single person who has a high level of earnings and paid social security taxes throughout her life expects to retire at age 65 and receive $10,000 per year until she dies.
Assume the person lives to age 80 and use a discountrate (10%) to find the presentvalue of the benefit received by person when he retires.

Which of the following statements is false?
a. If the discountrate (or interest) rate is positive, the future value of an unexpected series of payments will always exceed the presentvalue of the same series.
b. To increase present consumption beyond present income normally requires either the payment of interest or else an

Capital Budgeting Practice Problems
a. Consider the project with the following expected cash flows:
Year Cash flow
0 - $550,000
1 $ 90,000
2 $100,000
3 $450,000
If the discountrate is 0%, what is the project's net present v