6. NPV = 1,548 + 138/.09 = 14.67 (cost today plus the present value of the perpetuity)
7.PV = 4/(.14.04) = $40
8.a. PV = 1/.10 = $10
b. Since the perpetuity will be worth $10 in year 7, and since that is roughly
double the present value, the approximate PV equals $5.
PV = (1 / .10)/(1.10)7 = 10/2= $5 (approximately)
c. A perpetuity paying $1 starting now would be worth $10, whereas a perpetuity starting in year 8 would be worth roughly $5. The difference between these cash flows is therefore approximately $5. PV = 10 – 5= $5 (approximately)
d. PV = C/(rg) = 10,000/(.10.05) = $200,000.
9. a. PV = 10,000/(1.055) = $7,835.26 (assuming the cost of the car does not appreciate over those five years).
b. You need to set aside (12,000 × 6year annuity factor) = 12,000 × 4.623 =
$55,476.
c. At the end of 6 years you would have 1.086 × (60,476  55,476) = $7,934.
10.We did not cover continuous compounding so you do not need to worry about this question.
...Ryan Nguyen
04/13/2013
Dr. Choi
Finance 3300
Exam 3 Short Essay.
Net Presentvalue is the difference between an investment’s market value and its cost. For an example, you invest 100 dollars (Cost) into a lemonade stand but you receive 50 dollars (Market Value) of cash inflow. Another would be you buy a house for 50,000(Cost) But you sell it for 75,000(Market Value). Your net presentvalue An Investment should be accepted if the net presentvalue is positive and it should be rejected if the net presentvalue is negative. Net presentvalue uses the discounted cash flow of valuation, which is the process of valuing an investment by discounting future cash flows. Comparison to another rule, which is called the Internal rate of return, uses the discount rate that makes the NPV of an Investment zero. IRR finds the single rate that summaries the rate of return of a project. We only depend on cash flow of a particular investment not the rates offered elsewhere. For an example, you let your brother burrow 100 dollars but he pays you back 125 dollars. You would ask what is the return on this investment, which is 25% or 1.25 dollars back for every 1 dollar invested. This investment would be only valid if the required return is less than 25% because anything more would fall in negative...
...
Net presentValue, Mergers and acquisitions
Abstract
Main objective of undertaking this to report was learn about NPV presentvalue (NPV) method to make capital budgeting decision(Google NEW Project) and success factors involved in mergers and acquisitions(GoogleGroupon Case).
Answers to the Assignments
Part I: Google should go ahead with the new project.
PartII: Google’s acquisition of Groupon would have been win win situation for both corporations
Now I will discuss both parts in detail below.
Part I: Capital Budgeting
Capital budgeting is the process of making longterm planning decision relating to planning for capital assets as to whether or not money should be invested in the long term projects (en.wikipedia.com). Decisions like obtaining new facilities or purchase or new machinery to expand their business. It involves a financial analysis of the various alternative proposals regarding a capital expenditure and to select the best out of the several alternatives.
There are several methods of evaluating investment projects like NPV, IRR, Payback period and Profitability Index (www.investopedia.com). I will be discussing NPV and IRR for this assignment.
Net PresentValue (NPV)
NPV is a method which uses discounted cash flow techniques. Net PresentValue is equal to the difference between the Present...
...Finance for managers
Chapter 7— Net PresentValue and Other Investment
Question 1 : List the methods that a firm can use to evaluate a potential investment.
There are discounted and nondiscounted cashflow capital budgeting criteria to evaluate proposed investments. They are
1) Net presentvalue: NPV is a discounted cash flow technique, which is the difference between an investment’s marketvalue and its cost.
NPV = Presentvalue of cash inflow Presentvalue of cash outflow
The investment should be accepted if the net presentvalue is positive and rejected if it is negative.
2) Profitability index: PI is a discounted cash flow technique in which presentvalue of an investment’s future cash inflows divided by its initial cash outflow. It is also called benefit/cost ratio.
PI = PV of cash inflows / PV of cash outflows
If PI is positive, it will be accepted otherwise reject.
3) Internal rate of return: IRR is the discount rate that equates the presentvalues of cash inflows with the initial investment associated with the project thereby causing NPV = 0
If IRR ≥ required rate of return the project is accepted. If IRR < required rate of return the project is rejected.
4) Payback...
...
FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying Net PresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects
* working capital
* taxation
* inflation
2. Practice Questions
a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straightline over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Figures in 000's  
Year  0  1  2  3  4  5 
Unit Sales   500  600  1,000  1,000  600 
Revenues   2,000  2,400  4,000 ...
.... To find the PVA, we use the equation:
PVA = C({1 – [1/(1 + r)]t } / r )
PVA = $60,000{[1 – (1/1.0825)9 ] / .0825}
PVA = $370,947.84
The presentvalue of the revenue is greater than the cost, so your company can afford the equipment.
7. Here we need to find the FVA. The equation to find the FVA is:
FVA = C{[(1 + r)t – 1] / r}
FVA for 20 years = $3,000[(1.08520 – 1) / .085]
FVA for 20 years = $145,131.04
FVA for 40 years = $3,000[(1.08540 – 1) / .085]
FVA for 40 years = $887,047.61
Notice that doubling the number of periods does not double the FVA.
8. Here we have the FVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the FVA equation:
FVA = C{[(1 + r)t – 1] / r}
$40,000 = $C[(1.05257 – 1) / .0525]
We can now solve this equation for the annuity payment. Doing so, we get:
C = $40,000 / 8.204106
C = $4,875.55
9. Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation:
PVA = C({1 – [1/(1 + r)]t } / r)
$30,000 = C{[1 – (1/1.09)7 ] / .09}
We can now solve this equation for the annuity payment. Doing so, we get:
C = $30,000 / 5.03295
C = $5,960.72
10. This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation:
PV = C / r
PV = $20,000 / .08 = $250,000.00
11. Here we need to...
...Part I
A. PresentValue with Discount rate of 7% = 15000/(1+7%) = 15000/1.07 = $14,018.69
PresentValue with Discount rate of 4% = 15000/(1+4%) = 15000/1.04 = $14,423.08
B. Account A  PresentValue with Discount rate of 6% = 6500/(1+6%) = 6500/1.06 = $6,132.08
Account B  PresentValue with Discount rate of 6% = 12600/(1+6%)^2 = 12600/1.1236 = $11,213.96
C. PresentValue of Gold Mine 7% = 4900000/1.07 + 61,000,000/(1.07)^2 + 85,000,000/(1.07)^3
= 45,794,392.52 + 61,000,000/1.1449 + 85,000,000/1.2250
= 45,794,392.52 + 53,279,762.42 + 69,385,319.54
= $168,459,474.48
By using the same concept above we can determine the presentvalue of Gold Mine.
PresentValue of Gold Mine @ 5% = 175,421,660.73
PresentValue of Gold Mine @ 3% = 182,858,207.04
When the discount rate is 7%, the presentvalue of gold mine is $168.46m. This value increase by approximately $6.96 when the discount rate is 2% less than 7%. When the discount rate is 3% value of gold mine is 182.86.
Part II
A. Consider the project with the following expected cash flows:
Year  Cash flow 
0  $400,000 
1  $100,000 
2  $120,000 
3  $850,000 ...
...WHY IS THE CONCEPT OF PRESENTVALUE SO IMPORTANT FOR CORPORATE FINANCE?
The importance of concept of presentvalue to the world of corporate finance is that presentvalue calculations are widely used in business and economics to provide a means to compare cash flows at different times. Present Value’s definition and simplistic formula used for normal purchases, the concept’s importance to corporate finance and why presentvalue is the very first topic taught in finance classes explain that presentvalue is an essential knowledgeable tool to ensure we make the best decisions with our money.
However, first, What Does PresentValue  PV Mean? Presentvalue is “the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the presentvalue of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations.” Through the definition itself, an importance to corporate finance is explained as well as why professors begin a finance course with a basis explanation in the time value of money – discounting...
...Week 1
Capital Budgeting I
Tutorial: Chapter 1, 2Chapter 1
Introduction to Corporate Finance
Question 3: Investment and financing decisions
Vocabulary test. Explain the differences between:
a. Real and financial assets.
b. Capital budgeting and financing decisions
c. Closely held and public corporations
d. Limited and unlimited liability.
Answer
a. Financial assets, such as stocks or bank loans, are claims held by
investors. Corporations sell financial assets to raise the cash to invest in real assets such as plant and equipment. Some real assets are intangible.
b. Capital budgeting means investment in real assets. Financing means
raising the cash for this investment.
c. The shares of public corporations are traded on stock exchanges and can
be purchased by a wide range of investors. The shares of closely held corporations are not publicly traded and are held by a small group of private investors.
d. Unlimited liability: Investors are responsible for all the firm’s debts. A sole
proprietor has unlimited liability. Investors in corporations have limited liability. They can lose their investment, but no more.
Chapter2How to calculatePresentvalues
Question 6: Perpetuities
An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is the NPV?
Answer
NPV =...
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