Q1

450 usd

6%

to be repaid
375 usd
375 usd
$274.35
10700 usd

Q2

mth 4
mth 10

-10700
5.07%

400

500

Q3
delta investment
6%

year 1
-11000
-11000

Q4

4900
1300
6200
($5,849.06)
1
($5,849.06)
$5,150.94

investment

1300
1300
($1,157.00)
2
($7,006.05)
$3,993.95

-1400
-800
29
21
609

lawns
cash flow
total/wk
no of weeks
r

-2200

5% yearly

investment
wk1
wk2
wk3
wk4
wk5
wk6
wk7
wk8
wk9
wk10
wk11
wk12
Q5

year 2

-2200
609
609
609
609
609
609
609
609
609
609
609
609
255000 usd
360 rates
6% yearly
($1,528.85)

608.4149855908
607.8305331551

initial value

paid till now

60

refinance
$237,288.61
300 rates
5.50% yearly
($1,457.16)
investment
c1
c2

4300
$71.69
$71.69

Q6 gresita

$11,674.91
$7,374.91

1867 7.2MUSD
1867

Q7

year

Q8

year
year
year
year

255000
$254,746.15
$254,491.02
$254,234.62
$253,976.94
$253,717.97
$253,457.71
$253,196.15
$252,933.27
$252,669.08
$252,403.58
7.2

-7200000

$25,624,691.48

c not discounted
1
2
3
4

14000
14700
15435
16206.75

8000
8500
9000
9500

5%
4%
year
18 year
19 year
20 year
21 year
22 year
23 year
24 year
25 year
26 year
27 year
28 year
29 year
30 year
31 year
32 year
33 year
34 year
35 year
36 year

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

23,000
23,920
24,877
25,872
26,907
27,983
29,102
30,266
31,477
32,736
34,046
35,407
36,824
38,297
39,829
41,422
43,079
44,802
46,594

-22000
-23200
-24435
-25706.75
0
43000
44720
46508.8
48369.152
50303.91808
52316.0748032
54408.717795328
56585.066507141
58848.469167427
61202.407934124
63650.504251489
66196.524421548
68844.38539841
71598.160814347
74462.087246921

37 year 20
48,458 77440.570736797
38 year 21
50,396 80538.193566269
39 year 22
52,412 83759.72130892
40 year 23
54,508 87110.110161277
41 year 24
56,688 90594.514567728
42 year 25
58,956 94218.295150437
43 year 26
61,314 97987.026956455
44 year 27
63,767 101906.50803471
45 year 28
66,317 105982.7683561
46 year 29
68,970 110222.07909035
47 year 30
71,729 114630.96225396
48 year 31
74,598 119216.20074412
49 year 32
77,582 123984.84877388
50 year 33
80,685 128944.24272484
51 year 34
83,913 134102.01243383
52 year 35
87,269 139466.09293119
53 year 36
90,760 145044.73664843
54 year 37
94,390 150846.52611437
55 year 38
98,166 156880.38715894
56 year 39
102,093 163155.6026453
57 year 40
106,176 169681.82675111
58 year 41
110,423 176469.09982116
59 year 42
114,840 183527.86381401
60 year 43
119,434 190868.97836657
61 year 44
124,211 198503.73750123
62 year 45
129,180 206443.88700128
The timing of the tuition payments was done wrong. Unlike all other cash flows in this problem, the tuitions in both ye
$553,442.29

Q9

empty lot
insurance received
building costs
finished building costs
IRR
NPV

50000
330000
260000
355000
14.52%

8%

328703.7037037
18703.703703704
88703.703703704

$18,704; 14.52%
Q10

520000 3 years ago

4% annually

Here the calculations are easy if you understand a key aspect of finance: where does value come from? Look to the

($367.59)
($356.76)
($274.35)

Juanita has an opportunity to invest in her friend's cloth

1000

year 3

2000

year 4
1300
1300
($1,091.51)
3
($8,097.56)
$2,902.44

1300
1300
($1,029.72)
4
($9,127.28)
$1,872.72

2000

year 5
1300
1300
($971.44)
5
($10,098.71)
$901.29

4000

year 6

4000

year 7
1300
1300
($916.45)
6
($11,015.16)
($15.16)

1300
1300
($864.57)
7
($11,879.74)

In high school Jeff often made money in the summer by mowing lawns in the neighborhood.

0.0962% weekly

$7,262.53

$5,062.53

Da Feng is looking to refinance his home because rates have gone down since he purchase

no rate

value rate

interest/rate

value paid

remaining value

1
2
3
4
5
6
7
8
9
10
11

($1,528.85)
1275
($1,528.85) 1273.7307308
($1,528.85) 1272.45511526
($1,528.85) 1271.17312164
($1,528.85) 1269.88471806
($1,528.85) 1268.58987245
($1,528.85) 1267.28855262
($1,528.85) 1265.98072618
($1,528.85) 1264.66636062
($1,528.85) 1263.34542323
($1,528.85) 1262.01788115

$253.85
$255.12
$256.40
$257.68
$258.97
$260.26
$261.57
$262.87
$264.19
$265.51
$266.84

$254,746.15
$254,491.02
$254,234.62
$253,976.94
$253,717.97
$253,457.71
$253,196.15
$252,933.27
$252,669.08
$252,403.58
$252,136.74

The United States purchased Alaska in 1867 for $7.2M

$18,424,691

This question introduces you to the concept of an annuity with growth. The formulae is given on p.3, equation (7), of
total spend
$3,174,280.33 $2,274,280.33
22000 20560.7476636 Diane has just turned 18 and also completed high school. She is wonderi
23200 20263.7784959
24435 19946.2386218
25706.75 19611.5564923
7% 80382.3212736

-22,000
-46,200
-48,355
-50,584
-25,872
16,093
16,737
17,406
18,103
18,827
19,580
20,363
21,178
22,025
22,906
23,822
24,775
25,766
26,796
27,868

0
0
0
0
43000
44720
46508.8
48369.152
50303.91808
52316.0748032
54408.7177953
56585.0665071
58848.4691674
61202.4079341
63650.5042515
66196.5244215
68844.3853984
71598.1608143
74462.0872469

28,983
77440.5707368
30,142
80538.1935663
31,348
83759.7213089
32,602
87110.1101613
33,906
90594.5145677
35,262
94218.2951504
36,673
97987.0269565
38,140
101906.508035
39,665
105982.768356
41,252
110222.07909
42,902
114630.962254
44,618
119216.200744
46,403
123984.848774
48,259
128944.242725
50,189
134102.012434
52,197
139466.092931
54,285
145044.736648
56,456
150846.526114
58,714
156880.387159
61,063
163155.602645
63,505
169681.826751
66,046
176469.099821
68,687
183527.863814
71,435
190868.978367
74,292
198503.737501
77,264
206443.887001
in this problem, the tuitions in both years are paid at the beginning of the year
$105,864.76
$752,726.66
$105,864.76
$118,902.05

???

(15 points) Rafael owned an apartment building that burned down. The empty lot is worth $50,000 and Rafael has re

$270,966.13
($586,181.37)
e does value come from? Look to the future to figure out value.

271869.351810268

($314,312.02)

vest in her friend's clothing store. The initial investment is $10,700 and the expected annual cashflows thereafter are as follows:

year 8

Fabrice is looking to buy a new plug-in hybrid vehicle. The purchase price is $11,000 more than a simila

1300
1300
($815.64)
8
###

s in the neighborhood. He just finished his freshman year of college and, after taking a Business 101 class, he has some ideas

own since he purchased the house 5 years ago. He started with a 30-year fixed-rate mortgage of $255,000 at an annual rate of

aska in 1867 for $7.2M (where M stands for million). Assume that federal tax revenue from the state of Alaska (net federal expen

on p.3, equation (7), of the Note on Formulae, but I would encourage you to try doing it in Excel as well. (If the first cash flow is

school. She is wondering about the value of a college education. She is pretty good with numbers, and driven by financial consi

alternative

,000 and Rafael has received $330,000 from the insurance company. Rafael plans to build another apartment building that will

ws thereafter are as follows: {$400; $500; $1,000; $2,000; $2,000; $4,000; $4,000}. What is Juanita's IRR on this investment? (

$11,000 more than a similar conventional model. However, he will receive a $4,900 federal tax credit that he will realize at the

1 class, he has some ideas about how to scale up his lawn mowing operation. Previously, he had used his father's push mower,

55,000 at an annual rate of 6.00%. He has to make monthly payments. He can now get a 25-year fixed-rate mortgage at an an

of Alaska (net federal expenditures) is $55.1M in 2012 and that tax revenue started in 1868 and has steadily increased by 3%

well. (If the first cash flow is C, the next one will be C(1+g), and so on, where g is the growth rate in cash flow). As an example,

and driven by financial considerations only, so she sits down to calculate whether it is worth the large sum of money involved. S

apartment building that will cost $260,000. His real estate adviser estimates that the expected value of the finished building on

's IRR on this investment? (No more than two decimals in the percentage but do not enter the % sign.)

dit that he will realize at the end of the year. He estimates that he will save $1,300 per year in gas over the conventional model;

sed his father's push mower, but he is thinking about getting a riding mower that will save time and allow him to do more lawns.

ixed-rate mortgage at an annual rate of 5.50% on the remaining balance of his initial mortgage. This loan also requires monthly

s steadily increased by 3% annually since then. Assume that the cost of capital (or interest rate) is 6%. What is the NPV of the

cash flow). As an example, the present value of an annuity that starts one year from now at $100, and grows at 5%, with the las

e sum of money involved. She knows that her first year tuition will be $14,000, due at the beginning of the year (that is, right aw

e of the finished building on the real estate market will be $355,000 next year. The discount/interest rate is 8%. What are the N

ver the conventional model; these cash outflows can be assumed to occur at the end of the year. The cost of capital (or interes

allow him to do more lawns. He found a used, zero turn, riding mower on Craigslist for $1,400. He will also need a trailer to pull

s loan also requires monthly payments. In order to re-finance, Da Feng will need to pay closing costs of $4,300. These costs ar

6%. What is the NPV of the Alaska purchase, assuming that you are in 1867 looking forward? (Enter just the number in dollars

nd grows at 5%, with the last cash flow in year 10, when the discount rate is 7%, is $860. Confirm this before attempting the pr

of the year (that is, right away). Based on historical trends she estimates that tuition will rise at 5% per year for the 4 years she

rate is 8%. What are the NPV and IRR of this decision?

he cost of capital (or interest rate) for Fabrice is 6%. How long will Fabrice have to own the vehicle to justify the additional expe

will also need a trailer to pull the mower behind his pickup; that will cost him an additional $800. With the new mower he can take

s of $4,300. These costs are out of pocket and cannot be rolled into the new mortgage. How much will refinancing save Da Fen

er just the number in dollars without the $ sign or a comma and round off decimals.)

his before attempting the problem using both the formula and excel. What is the NPV of of a new software project that costs $9

per year for the 4 years she is in school. She also estimates that her living expense above and beyond tuition will be $8,000 pe

o justify the additional expense over the conventional model? In other words, what is the DISCOUNTED payback period in yea

the new mower he can take on an additional 29 lawns per week at an average cash inflow of $21 per lawn he will receive at th

will refinancing save Da Feng? (i.e. What is the NPV of the refinancing decision?)

oftware project that costs $900,000 today, but has a cash flow of $180,000 in year 1 that grows at 7.0% per year till year 20? Si

ond tuition will be $8,000 per year (assume this occurs at the end of the year) for the first year and will increase $500 each yea

NTED payback period in years? Discount future cash flows before calculating payback rounded UP to a whole year. (Enter just t

per lawn he will receive at the end of each week. He has 12 weeks of summer in which to mow lawns. (For convenience, assum

.0% per year till year 20? Similar investments earn 7.6% per year. (Enter just the number in dollars without the $ sign or a comm

will increase $500 each year thereafter to keep up with inflation. She does not plan to work at all while attending school. Were s

o a whole year. (Enter just the number without comma and round off decimals.)

s. (For convenience, assume that the mower and trailer will have no value after Jeff is done with his work this summer.) The dis

without the $ sign or a comma and round off decimals.)

ile attending school. Were she to forgo college she would be able to make $23,000 per year out of high school and expects tha

s work this summer.) The discount rate for Jeff is 5% (note that this is an annual rate). What is the Net Present Value of the mow

high school and expects that to grow 4% annually. With the college degree, she estimates that she will earn $43,000 per year o

Net Present Value of the mower/trailer project?

will earn $43,000 per year out of college, again with annual 4% increases in salary. Either way, she plans to work until 63 (she b

plans to work until 63 (she begins college right away). The interest/discount rate is 7%. What is the NPV of her college educati

NPV of her college education? (Note: All cash flows except tuition payments occur at the end of the year.)

110
7333.333

1.50%
100%