Based on your calculations in Tab 2, Question 8, which offer should LGI accept for the Bowie plant? Explain why. Be sure to include the concepts of risk and potential return as part of your discussion.

1. How many years would be required to pay off a loan with the following characteristics?
PV	$11,500
RATE	10.6%
PMT	$1,600	(annual payments)
NPER =	14.2428
2. What is the annual payment required to pay off a loan with the following characteristics?
PV	$14,700
RATE	10.0%
NPER	10	years
PMT =	$ 2,387.22
3. Why is FV not part of the calculations for either question 1 or question 2?
It is assumed that the FV is zero because the FV will be zero when the loan is paid in full.
4. At what annual rate of interest is a loan with the following characteristics?
NPER	17	years
PMT	$100,000
PV	$1,000,000
Interest Rate =	6.66%
For questions 5-8, LGI's cost of capital is		8.11%
5. LGI projects the following after-tax cash flows from operations from
its aging Bowie, Maryland distribution facility (which first went on line in 1953)
over the next five years. What is the PV of these cash flows?
	Projected after-tax cash flows
Year	(in $ millions)
1	(40)	($37.00)
2	(40)	($34.22)
3	(40)	($31.66)
4	(40)	($29.28)
5	(40)	($27.09)
	PV =	($159.25)
PV =
6. LGI extended the analysis out for an additional 7 years, and generated the
following projections. What is the PV of these cash flows?
	Projected after-tax cash flows
Year	(in $ millions)
1	(40)	($37.00)
2	(40)	($34.22)
3	(40)	($31.66)
4	(40)	($29.28)
5	(40)	($27.09)
6	(40)	($25.05)
7	(40)	($23.17)
8	(40)	($21.44)
9	(40)	($19.83)
10	(40)	($18.34)
11	(40)	($16.96)
12	(40)	($15.69)
		($92.26)
7. The CFO asked you to undertake a more detailed analysis of the plant's costs, noting that while
it is convenient for making calculations when projections result in data that can be treated like an annuity,
this does not always represent the most accurate estimate of future results. What is the PV of these cash flows?
	Projected after-tax cash flows
Year	(in $ millions)
1	(40)	($37.00)
2	(50)	($42.78)
3	(55)	($43.53)
4	(60)	($43.92)
5	(70)	($47.40)
		($214.63)
8. As part of a larger plan to sell off underperforming assets, LGI is considering selling the Bowie property
and using other existing facilities more efficiently. LGI received four preliminary offers from potential buyers for the Bowie
property. What is the PV of each offer?
							PV of each offer (in $ millions)
Offer A	$102.17 million, paid today						$ 102.17
Offer B	$19.85 million per year, to be paid over the next 8 years						$113.60
Offer C	$201.88 million, to be paid in year 8						$108.18
Offer D	$18.09 million per year, to be paid over the next 7 years and						$122.26
	a $53.05 million payment in year 8
9. From a profit maximizing point of view, which offer should LGI accept?
To obtain the most profit, LGI should accept offer D.
10. Define the term annuity in your own words. How might the concept of an annuity impact the process of
capital budgeting and new asset acquisition?
An annuity is a payout received on a regular basis, usually of the same amount and at regular intervals over a certain period of time. It is important to estimate the amount of annuity produced per year in order to determine if the project or new asset will generate net gain or net loss for the company. NPV and other capital budgeting tools are used in conjunction.