Solved by verified expert :MGMT
E-2000
Fall,
2014
Problem Set 3
(Due
Tuesday, Oct. 14)
(100
pts.)
For
all problems involving computation, you must show your work to receive any
credit. Two points will be deducted for
arithmetic errors, if all other components of your answer are correct.
1. (10 pts.)
Find the future value of
$500, invested at 6% annual interest, compounded monthly, for three years?
2. (15 pts.)
Find the present value of
$374, paid exactly nine years from now, if the required rate of return is 9%.
3. (15 pts.)
You’re saving for your
daughter’s college expenses. She’s now
seven years of age, and you assume she’ll start college at age eighteen. You figure that the total for four years of
college will be $150,000. If you can
earn 2% interest on a college savings account, how much will you need to put in
the account now to have $150,000 when your daughter starts college?
4. (15 pts.)
If the present discounted
value of $139 received a year from today is $125, what is the discount rate?
5. (20 pts.)
A factory costs
$800,000. You reckon that it will
produce an inflow after operating costs of $170,000 a year for 10 years. If the opportunity cost of capital is 14%,
what is the net present value (NPV) of the factory?
6. (25 pts.)
After graduation
from Harvard Extension, you decide to stay in the Cambridge area and start your
own business. You think you see a couple
of opportunities.
Knowing
first-hand the pressure Harvard students are under, you consider opening a
business that allows them to let off steam and get rid of their
aggression: A paintball center right in
The Square.
The cost of the
project would be $150,000, payable up front, while revenues are expected to be
$7,500 per year, forever.
a. (5 pts.)
If the interest
rate on comparable assets is 4%, is this project worthwhile? Show your calculations.
b. (10 pts.)
What is the
project’s internal rate of return (IRR)?
Show your calculations.
You are also
considering a second business opportunity:
Supplying fish, fresh from the bottom of the Charles River, to Harvard
Dining Services, for the next three years in return for an up-front payment
from them of $15,000. You figure it will
cost you $5,000 a year in supplies to provide this culinary joy.
So, the revenue
and costs of the project can be summarized as follows:
Immediate and
only revenue: $15,000
Costs in Year 1: $ 5,000
Costs in Year 2: $ 5,000
Costs in Year 3: $ 5,000
c. (10 pts.)
Find this
project’s internal rate of return (IRR).
Show your calculations.
