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Time value / NPV

You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children's college expenses to be $21,000 per year per child, payable at the end of each school year. The annual interest rate is 15 per cent. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college.

How much money must you deposit in an account each year to fund your children's education?

A software development company is considering the purchase of a specialized interactive computer costing $500,000 with an economic life of 5 years. The computer will be fully depreciated over 5 years using the straight-line method. The market value of the computer will be $100,000 in five years. The computer will replace division employees whose salaries combined total is $120,000 per year. The computer will also immediately lower the firm's required net working capital by $100,000. This amount of net working capital will be replaced once the computer is sold. The corporate tax rate is 34%.

a. Is it worthwhile to buy the computer if the appropriate discount rate is 12 percent?
b. What specific factors drive the NPV Project decision?


Solution Summary

The solution explains how to determine the savings each year to get a desired future value and how to calculate the NPV of a project