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# The Time Value of Money, Cost of Capital, Trade Discount, NPV

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1. You lend a friend \$15,000, for which your friend will repay you \$37,313 at the end of five years. What interest rate are you charging your "friend"?

2. You plan to buy some property in Florida five years from today. To do this, you estimate that you will need \$20,000 at that time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 12 percent annually. If you make your first deposit at the end of this year, and you would like your account to reach \$20,000 when the final deposit is made, what will be the amount of your deposits?

3. The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of common equity for the firm is 20 percent, the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower's cost of capital? The firm's marginal tax rate is 34 percent.

4. If a firm buys on trade credit terms of 2/10, net 60 and decides to forgo the trade credit discount and pay on the net day, what is the effective annualized cost of forgoing the discount?

5. Mo-Lee's Sportswear is considering building a new factory to produce soccer equipment. This project would require an initial cash outlay of \$10,000,000 and will generate annual free cash inflows of \$2,500,000 per year for eight years. Calculate the project's NPV given:

a. A required rate of return of 9 percent
b. A required rate of return of 11 percent
c. A required rate of return of 13 percent
d. A required rate of return of 15 percent

#### Solution Preview

1. You lend a friend \$15,000, for which your friend will repay you \$37,313 at the end of five years.  What interest rate are you charging your "friend"?

r= 20.00% =(37313/15000)^(1/5)-1
^ stands for raised to the power of

2. You plan to buy some property in Florida five years from today.  To do this, you estimate that you will need \$20,000 at that time for the purchase.  You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 12 percent annually.  If you make your first deposit at the end of this year, and you would like your account to reach \$20,000 when the final deposit is made, what will be the amount of your deposits?

n= 5
r= 12.00%
FVIFA (5 periods, 12.% rate ) = 6.352847

Future value= \$20,000
Therefore, annuity= \$3,148.19 =20000/6.352847