Question 1

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t=0). You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60% of revenues. (Assume all revenues and costs occur at year end, i.e., t=1, t=2, t=3.) the equipment depreciates using straight-line depreciation for $10,000 and also recover the investment in net working capital. The corporate tax rate is 30% and the cost of capital is 12%. Calculate the NPV of the project.

Question 2

A building is appraised at $1 million. This estimate is based on forecasted net rent of $100,000 per year discounted at a 10% cost of capital [PV = 100,000/ 0.1 = 1,000,000]. The rent is the net of repair and maintenance costs and taxes. Suppose the building is currently uninhabitable. It will take one year and $250,000 of work (spent at the end of the year) to bring it into rentable condition. How much would you be willing to pay for the building today?

Question 3

CK Company stockholders expect to receive a year-end dividend of $5 per share and then immediately sell their shares for $115 dollars per share. If the required rate of return for the stock is 20 percent, what is the current value of the stock?