1.You are considering a project that offers up the following possible payout with an opportunity cost of 20%.

Time 0 1 2

Base Case -$60,000 10,000 10,000

At the end of year two, you know there is a 10% possibility you will buy out your competitor which has the potential to create opportunities that are worth $999,672 at that time.

How much potential value is created or lost by taking on this project (i.e. what is the NPV)?

2.

Your firm has an opportunity to invest in a project that costs $793 and will return two payments of $500 per year. If the interest rate is 10%, what is the current NPV of this project?

3.

You are considering a project with an opportunity cost of 10% and that offers up the following two possible payouts based on your ability to market the product:

In the optimistic state, you expect the following payouts: -$4,062, $8,000, $8,000. Based on your pessimistic expectations, you expect the following -$4,062, -$500, -$10,000. The cash flows fall at time periods 0, 1, and 2.

Your sense is that there is a 40% chance things will turn out well and a 60% chance things will turn out poorly. What is your expected NPV if you are able to abandon the project after year one?

4.

Your firm has an opportunity to invest in a project that costs $800 and you expect it to return two payments of $500 per year. The interest rate of the project is 10%. The current NPV of the project is $67.77.

You also have the option to wait one year to invest $800. If you wait, you will know more and can revise your expectations such that you either expect to return two payments of $750 with a probability of 0.4 or, alternatively, two payments of $300 (the probability of this is equal to 1 minus the probability of the first result). The interest rate of the project is still 10%.

What is the current present value of the NPV, if they choose to wait?

5.

Consider the following capital budgeting problem: you invest $100 in a machine and expect to receive $49 in each of the next three years. The discount rate is 10%.

Suppose you decide to invest in the machine. What would you be willing to sell the machine for the day after you bought it for $100?

6.