Whenever possible, draw the time line first and show work.

1.For the following cash-flows (CF's):$100 in year one, $200 in years two and three, and $400 in years four and five. The current interest rate is 7%.

1. How much are you willing to pay today?
2. How about in year 6?
3. How about in year 3?

1. If an investor contributes $100 each year and can earn 8% per year, what is the present value of this cash stream?

1. Assume a 10% discount rate. Which among the choices below have the highest value, A or B, if any? Show work.

A.$1,000 per year for perpetuity (first payment at the end of the first period).

B.$10,000 in cash

4. (NPV) A company has the choice between two different types of machines. Machine A costs less, but it also has a shorter life expectancy of two years. B costs more but lasts longer for four years. The expected cash flows after taxes for the two different types are as follows:

Machine

0

1

2

3

4

A

(10,000)

8,000

8,000

B

(12,000)

5,000

5,000

5,000

5,000

The cost of money of the firm is 10%.Analyze the two options and advise the company which one is better.

5. (NPV) State Electric wants to decide whether to repair or replace electric meters when they break down. A new meter cost $30 and, on the average, will operate for 12 years without repair. It costs $18 to repair a meter, and a repaired meter will, on average, operate for 8 years before it again needs a repair. Repairs can be made repeatedly to meters because they are essentially rebuilt each time they are repaired. It costs $6 to take out and reinstall a meter. The time value of money is 0.05. Should the company repair old meters or buy new meters?

New (A)

Old (B)

Cost

($30)

($18)

Repair and reinstall cost

($6)

($6)

Life of Meter

12 years

8 years