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Feedback Assignment 3
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You submitted this Assignment on Sun 16 Mar 2014 6:04 AM PDT. You got a score of 90.00 out of 100.00. You can attempt again, if you'd like.

Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.

Question 1
(5 points) Becky needs another $1,200 in her vehicle fund to purchase the car she wants. Her parents offer to loan her the money, but want to teach her about the time value of money. They offer to have her repay the loan in the future using birthday and holiday money. They agree that she will repay $450 at each of her next two birthdays and one holiday season. These events are 3, 6 and 15 months from now. Assume a 6% cost of capital. Assume there is no risk of default, and that compounding is monthly. What is the NPV of the loan? (Enter just the number without the $ sign or a comma; round off decimals.) You entered: 97

Your Answer 97 Total

Score 5.00 5.00 / 5.00

Explanation Correct. You know compounding and figuring out NPV.

Question Explanation This is a simple NPV problem, where the loan is positive NPV only because Becky cannot borrow at market rates,

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Question 2
(5 points) Jacob has an opportunity to invest in a new retail development in his building. The initial investment is $50,000 and the expected cashflows are as follows: Year 1: $2,500 Year 2: $5,000 Year 3: $5,000 Year 4: $7,500 Year 5: $10,000 Year 6: $10,000 Year 7: $15,000 Year 8: $15,000 What is Jacob's IRR on this investment?(No more than two decimals in the percentage interest rate, but do not enter the % sign.) You entered: 6

Your Answer 6 Total

Score 0.00 0.00 / 5.00

Explanation

Question Explanation This is a simple IRR calculation. Drawing a time line helps.

Question 3
(5 points) Fabrice is looking to buy a new plug-in hybrid vehicle. The purchase price is $12,000 more than a similar conventional model. However, he will receive a $7,500 federal tax credit that he will realize at the end of the year. He estimates that he will save $1,200 per year in gas over the conventional model; these cash outflows can be assumed to occur at the end of the year. The cost of capital (or interest rate) for Fabrice is 6%. How long will Fabrice have to own the vehicle to justify the additional expense over the conventional model?( i.e, What is the DISCOUNTED payback period in years? Discount future cash flows before calculating payback and round to a whole year.) You entered: 4

Your Answer 4 Total

Score 0.00 0.00 / 5.00

Explanation

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Question Explanation Simple payback calculation, but with discounting.

Question 4
(10 points) In high school Jeff often made money in the summer by mowing lawns in the neighborhood. He just finished his freshman year of college and, after taking a Business 101 class, he has some ideas about how to scale up his lawn mowing operation. Previously, he had used his father's push mower, but he is thinking about getting a riding mower that will save time and allow him to do more lawns. He found a used, zero turn, riding mower on Craigslist for $1,200. He will also need a trailer to pull the mower behind his pickup; that will cost him an additional $600. With the new mower he can take on an additional 20 lawns per week at an average cash inflow of $20 per lawn he will receive at the end of each week. He has 14 weeks of summer in which to mow lawns. (For convenience, assume that the mower and trailer will have no value after Jeff is done with his work this summer.) The discount rate for Jeff is 10% (Keep in mind this is an annual rate). What is the Net Present Value of the mower/trailer project? Your Answer 3117 -1147 4320 3720 10.00 Correct. You know how to set up and calculate NPV, at a weekly interval. Score Explanation

Total

10.00 / 10.00

Question Explanation A fairly common NPV problem, with weekly compounding.

Question 5
(10 points) Yassein is looking to refinance his home because rates have gone down from when he bought his house 10 years ago. He started with a 30-year fixed-rate mortgage of $288,000 at
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an annual rate of 6.5%. He can now get a 20-year fixed-rate mortgage at an annual rate of 5.5% on the remaining balance of his initial mortgage. (All loans require monthly payments.) In order to re-finance, Yassein will need to pay closing costs of $3,500. These costs are out of pocket and cannot be rolled into the new mortgage. How much will refinancing save Yassein? (i.e. What is the NPV of the refinancing decision?) Your Answer 17517 16467 15463 16975 10.00 Correct. This is a very common situation we all face all the time. Total 10.00 / 10.00 Score Explanation

Question Explanation A problem we saw last week, but I expect you to do this routinely now. It is a value generating opportunity through financing only because interest rates changed.

Question 6
(10 points) The United States purchased Alaska in 1867 for $7.2M (where M stands for million). Assume that federal tax revenue from the state of Alaska (net federal expenditures) will be $50M in 2012 and that tax revenue started in 1868 and has steadily increased by 3% annually since then. Assume that the cost of capital (or interest rate) is 7%. What is the NPV of the Alaska purchase? (Hint: Try and imagine you are in 1867 looking forward.)(Enter just the number without the $ sign or a comma; round off decimals.) You entered: 10515347

Your Answer 10515347 Total

Score 10.00 10.00 / 10.00

Explanation Correct. You can travel in time, both directions.

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Question Explanation Slightly tricky only if you have not drawn a timeline.

Question 7
(10 points) This question introduces you to the concept of an annuity with growth. The formula is given on p.3, equation (7), of the Note on Formulae, but I would encourage you to try doing it in Excel as well. (If the first cash flow is C, the next one will be C(1+g), and so on, where g is the growth rate in cash flow). As an example, the present value of an annuity that starts one year from now at $100, and grows at 5%, with the last cash flow in year 10, when the discount rate is 7%, is $860. Confirm this before attempting the problem using both the formula and excel. What is the NPV of of a new manufacturing project that costs $100,000 today, but has a cash flow of $15,000 in year 1 that grows at 4% per year till year 12? Similar investments earn 7.5% per year. (Enter just the number without the $ sign or a comma; round off decimals.) You entered: 40486

Your Answer 40486 Total

Score 10.00 10.00 / 10.00

Explanation Correct. Hope you used both methods.

Question Explanation This is a set up and calculation problem, nothing new conceptually.

Question 8
(15 points) Diane has just 18 and also completed high school and is wondering about the value of a college education. She is pretty good with numbers, and driven by financial considerations only, so she sits down to calculate whether it is worth the large sum of money. She knows that her first year tuition will be $12,000, due at the beginning of the year (that is, right away). Based on historical trends she estimates that tuition will rise at 6% per year for the 4 years she is in school. She also estimates that her living expense above and beyond tuition will be $8,000 per year (assume this occurs at the end of the year) for the first year and will increase $500 each year
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thereafter to keep up with inflation. She does not plan to work at all while attending school. Were she to forgo college she would be able to make $25,000 per year out of high school and expects that to grow 3% annually. With the college degree, she estimates that she will earn $45,000/year out of college, again with annual 3% increases in salary. Either way, she plans to work until 60 (she begins college right away). The interest/discount rate is 6%. What is the NPV of her college education? (Note: All cash flows except tuition payments occur at the end of the year.) Your Answer 127072 142062 134021 92821 Total 15.00 / 15.00 Score 15.00 Explanation Correct. You have analyzed a real world problem.

Question Explanation This is a multi-step problem that puts everything together. Makes you analyze a problem that we all face all the time; to get something we have to give up something.

Question 9
(15 points) Rafael owned an apartment building that burned down. The empty lot is worth $70,000 and Rafael has received $200,000 from the insurance company. Rafael plans to build another apartment building that will cost $275,000. His real estate adviser estimates that the expected value of the finished building on the real estate market will be $385,000 next year. The discount/interest rate is 10%? What are the NPV and IRR of this decision? Your Answer (-$5,000, -11.59%) ($500, 5.35%) (-$500, -5.35%) (-$7,000,
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Score

Explanation

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-22.63%) ($7,000, 22.63%) ($5,000, 11.59%) Total 15.00 Correct. You know what cash flows matter and how to figure out both NPV and IRR, albeit in a simple context,

15.00 / 15.00

Question Explanation A simple calculation, but the problem has an interesting aspect from real life.

Question 10
(15 points) Roxanne invested $500,000 in a new business 6 years ago. The business was expected to pay $8,000 each month for the next 21 years (in excess of all costs). The annual cost of capital (or interest rate) for this type of business was 9%. What is the value of the business today?(Enter just the number without the $ sign or a comma; round off decimals.) You entered: 788747

Your Answer 788747 Total

Score 15.00 15.00 / 15.00

Explanation Correct. Value is always based on the future cash flows.

Question Explanation Here again the calculations are easy if you understand a key aspect of finance; look to the future to figure out value.

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