4.52 Income from a project is expected to decline at a constant rate from a init
ID: 1186132 • Letter: 4
Question
4.52
Income from a project is expected to decline at a constant rate from a initial value of $500,000 at time 0 to a final value of $40,000 at the end of year 3. If interest is compounded continuously at a nominal annual rate of 11%, determine the present value of this continuous cash flow.
4.53
A sum of $16,000per year will be received uniformly over a five-year period beginning two years from today. What is the present value of this deferred- funds flow if interested is compounded continuously at a normal rate of 9%.
Explanation / Answer
?
Capital budgeting techniques (Chapter 11)
(1) Net present value (NPV): present value of future net cash flows, discounted at
the cost of capital
N
CFt
NPV ? ?
, where r is the cost of capital, CFt is the cash flow in time t
t
t ? 0 (1 ? r )
(2) Internal rate of return (IRR): rate of return a project earns (a discount rate that
forces a project
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