17. An investment is expected to generate $2,000,000 each year for five years. I
ID: 2697602 • Letter: 1
Question
17. An investment is expected to generate $2,000,000 each year for five years. If the firm's cost of funds is 5%, what is the maximum amount the firm should pay for the investment? (for any credit, show your work)
18. You put $200,000 in the bank today; if the annual interest rate paid by the bank is 20.5%, and you do not make any withdrawals for 20 years, what will be your balance at that time? (for any credit, show your work)
19. You are offered two jobs. One initially pays $100,000 annually, and your salary will grow annually at 11.5%. The other pays pays $97,000 annually, but your salary will grow at 12%. After ten years, which job pays the higher salary? (for any credit, show your work)
20. A firm has the following investment alternatives:
Cash Inflows
Year A B C
1 $500 $0 $0
2 500 400 0
3 500 800 0
4 600 900 1,900
Explanation / Answer
17. firm should not pay more than present value of future cash flow i.e = 2000000*pvifa(5,5)
= 2000000*4.3295
= $8659000
18. balance = 200000*(1.205)^20 = $83324115.80
19. salary after 10 yr of 100000 = 100000*(1.115)^10 = $296994.68
salary after 10 yr of 97000 = 97000*(1.12)^10 = $301267.27. (higher)
20.
pv(a)= 1532.67
pv(b) = 1568.93
pv(c) = 1321.58
investment b should be considered
21.
EBIT = 40000000-1250000-10250000=$28500000
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