FINE 332 Corporate Finance

Module 2 Problem Set Discounted Cash Flow Valuations and Net Present Value

1. You are offered three annuities (these make equal payments over a specific period). Using an annual

4.2% discount rate, calculate each annuity’s price:

# Price ($) Payments ($/year) Life (yrs.) 1 ? 195 10 2 ? 200 (growing @1%/yr.) 10 3 ? 49 (growing @1%/yr.) Forever

2. You need to purchase a machine. It costs $75,000 and will expand cash flow by $10,000/year in year 1,

growing by 2.3% per year after that. The system will work for 10 years before you have to replace it. What are the NPV (at a 4.2% discount rate) and IRR? The vendor offers you another machine costing $120,000 and lasting 15 years, with the same starting cash flow and a 2.5% growth rate. What are the NPV and the IRR for it? Which machine should you purchase?

3. Read Why the Mets Pay Bobby Bonilla $1.19 Million Every July 1

a. Use July 1, 2011, to calculate the future value of the $5.9M owed on July 1, 2000 b. Use July 1, 2011, to calculate the present value of the 25 yearly payments of

$1,193,248.20. The first payment is made on July 1, 2011 c. Should Bobby take it? Why?

4. You are looking to lease a car and the dealer offers you:

Car price = $36,000 Monthly payments = $699 Down payment = $1,000 Lease term = 36 months Purchase price at end of lease = $18,000 What is the implicit interest rate on the lease?

5. The Airbus A220 has the following R&D costs (all negative cash flows):

€300M (year 1) €200M (year 2) €100M (year 3)

Each plane will be sold for €45M – 20% down and the rest due on delivery one year later. The cost to produce each plane is €35M – these costs are recognized on delivery. Sales says that you will sell 35 planes (year 4), growing by 5 planes per year. The last sale is made in year 10, when it is replaced by a new model. What are the NPV (as of the beginning of year 1) and the IRR of the plane using a 10% discount rate?

FINE 332 Corporate Finance