1. A business is projected to make $100,000 per year starting immediately and co

Question

1. A business is projected to make $100,000 per year starting immediately and continuing for the next 3 years after that. How much is it worth now if i = 10%?

A. $100,000 (PV/A,10%,3)

B. $100,000 (PV/A,10%,3)+$100,000

C. $100,000 [i(1+i)3/[(1+i)3-1]]

D. $100,000 [i(1+i)3/[(1+i)3-1]]-1

E. $400,000

F. $1,000,000

2. If you invest $100,000 today and get $50,000 back in each of the next 3 years, what is the IRR ?

3. If you borrow $20,000 and it is paid back over the next five years in equal installmentsat 10% interest such that those payments retire the loan at the end of 5 years, what is the balance on the load at the end of year 2?

4.Which decision criteria works best under all circumstances ?

A. NPV greater than or equal to zero

B. PI greater than or equal to one

C. IRR greater than or equal to the minimum return

D. None of the above

5. A project has an NPV of $100,000 at i = 10%. You are asked to calculate its IRR. Do you think it will be greater than 10% ?

Explanation / Answer

1)

B. $100,000 (PV/A,10%,3)+$100,000

2)

0 = -100000 + 50000/(1+IRR) + 50000/(1+IRR)^2 + 50000/(1+IRR)^3

IRR = 23.38%

3)

balance on loan = 13169.44

4)

C. IRR greater than or equal to the minimum return

5)

yes , greater than 10%

since NPV is positive, IRR likely to be grater than return

Beginning Balance Interest Principal Ending Balance 1 $20,000.00 $1,853.93 $3,245.35 $16,754.64 2 $16,754.64 $1,514.10 $3,585.18 $13,169.44 3 $13,169.44 $1,138.68 $3,960.60 $9,208.83 4 $9,208.83 $723.95 $4,375.33 $4,833.49 5 $4,833.49 $265.78 $4,833.50 $0.00

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