Suppose a project will provide the following costs (cash outflows) and benefits (cash inflows). 

 Year 0: cost $180 million

Year 1: cost $180 million

Year 2: cost $200 million

Year 3: benefit $250 million, cost $140 million

Year 4: benefit $250 million

Year 5: benefit $300 million

 

a.   Create a professionally formatted table showing the PDV of this project for interest rates of 2%, 3%, 5%, 7%, 10%, 12%, and 15%. Show your work elsewhere; this table should have only two columns, one with the interest rates and one with the PDVs (8 pts).

 

b.   Create a line graph (what Excel calls an X Y scatter, but connect the points with a smooth curve) showing the PDV on the Y axis and the discount rate on the X axis (8 pts).

 

c.   Explain your findings (4 pts): 

1. When interest rate is 2%, you [will OR will not] implement the project. 
2. When interest rate is 3%, you [will OR will not] implement the project. 
3. When interest rate is 5%, you [will OR will not] implement the project. 
4. When interest rate is 7%, you [will OR will not] implement the project. 
5. When interest rate is 10%, you [will OR will not] implement the project. 
6. When interest rate is 12%, you [will OR will not] implement the project. 
7. When interest rate is 15%, you [will OR will not] implement the project. 
8. Explain how interest rates influence your choice of these project. 

 

3.  Assume that $10,000 was invested in the stock of General Medical Corporation with the intention of selling after one year. The stock pays no dividends, so the entire return will be based on the price of the stock when sold. The opportunity cost of capital on the stock is 10 percent (20 pts).

 a.  To begin, assume that the stock sale nets $12,000. What is the dollar return on the stock investment? (10 pts)

b.  Assume that the stock price falls and the net is only $9,000 when the stock is sold. What is the dollar return? 

Answer rating: 100% (QA)

SOLUTION a To calculate the present value PV of the project for different interest rates we need to discount each cash flow to its present value and then sum them up The present value of a cash flow c... View the full answer