1. A firm has undertaken a feasibility study to evaluate a project that has the

Question

1. A firm has undertaken a feasibility study to evaluate a project that has the following estimated cashflows:

-Amount borrowed to fund project is $200,000 with interest of 8% pa paid yearly.

If the firm is facing a discount rate of 10%, what is the NPV of this project?

a. $395,999

b. $516,155

c. $455,420

d. $506155

2. You are evaluating the purchase of a vehicle for your business. You've decided that the best choice is a car that will cost you $35,000, but you're uncertain how long you should plan on holding the car before you replace it. The table below lists the running costs and salvage value of the vehicle for each year.

What is the annual equivalent cost of replacing the vehicle every 4 years? Assume your cost of capital is 16.1%. Enter your answer to the nearest cent. Ignore taxes.
(Your answer will be a cost, and therefore a negative number. Don't forget the minus sign.)____________________

1 2 3 4 5 Running Costs -3000 -3500 -4000 -4500 -5000 Salvage Value 25000 20000 15000 10000 5000

Explanation / Answer

2.

You should calculate NPV first:

NPV = -$35,000 - ($3,000/1.161) - ($3,500/1.161^2) - ($4,000/1.161^3) - ($4,500/1.161^4)
NPV = -$45,213.34363

Then, compute Annual Equivalent



After you insert those values, you answer should be AE=-$16,190.38802

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