Question 1: Present Values<\/p>\n
Your firm’s geologists have discovered a small oil field in New York’s Westchester County. The field is forecasted to produce a cash flow of C\u00a01\u00a0= $2 million in the first year. You estimate that you could earn an expected return of\u00a0r\u00a0= 12% from investing in stocks with a similar degree of risk to your oil field. Therefore, 12% is the opportunity cost of capital. \u00a0What is the present value? The answer, of course, depends on what happens to the cash flows after the first year.<\/p>\n
Calculate present value for the following cases:<\/p>\n
The cash flows are forecasted to continue forever, with no expected growth or decline.<\/p>\n
The cash flows are forecasted to continue for 20 years only, with no expected growth or decline during that period.<\/p>\n
The cash flows are forecasted to continue forever, increasing by 3% per year because of inflation.\u00a0<\/p>\n
The cash flows are forecasted to continue for 20 years only, increasing by 3% per year because of inflation.<\/p>\n
Question 2: Continuous Compounding<\/p>\n
How much will you have at the end of 20 years if you invest $100 today at 15% annually compounded? How much will you have if you invest at 15% continuously compounded?<\/p>\n
Question 3: IRR Rule<\/p>\n
Cash Flows ($ thousands)<\/p>\n
Project<\/p>\n
C0<\/p>\n
C1<\/p>\n
C2<\/p>\n
C3<\/p>\n
A<\/p>\n
-100<\/p>\n
+60<\/p>\n
+60<\/p>\n
0<\/p>\n
B<\/p>\n
-100<\/p>\n
0<\/p>\n
0<\/p>\n
+140<\/p>\n
Calculate the NPV of each project for discount rates of 0%, 10%, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis.<\/p>\n
What is the approximate IRR for each project?<\/p>\n
In what circumstances should the company accept project A?<\/p>\n
Calculate the NPV of the incremental investment (B- A) for discount rates of 0%, 10%, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.<\/p>\n
Question 4: Capital Rationing<\/p>\n
Suppose you have the following investment opportunities, but only $90,000 available for investment. Which projects should you take?<\/p>\n
Project<\/p>\n
NPV<\/p>\n
Investment<\/p>\n
1<\/p>\n
5,000<\/p>\n
10,000<\/p>\n
2<\/p>\n
5,000<\/p>\n
5,000<\/p>\n
3<\/p>\n
10,000<\/p>\n
90,000<\/p>\n
4<\/p>\n
15,000<\/p>\n
60,000<\/p>\n
5<\/p>\n
15,000<\/p>\n
75,000<\/p>\n
6<\/p>\n
3,000<\/p>\n
15,000<\/p>\n
Internal<\/p>\n
Internal<\/p>\n","protected":false},"excerpt":{"rendered":"
Question 1: Present Values Your firm’s geologists have discovered a small oil field in New York’s Westchester County. The field is forecasted to produce a cash flow of C\u00a01\u00a0= $2 million in the first year. You estimate that you could earn an expected return of\u00a0r\u00a0= 12% from investing in stocks with a similar degree of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[10],"class_list":["post-80949","post","type-post","status-publish","format-standard","hentry","category-research-paper-writing","tag-writing"],"_links":{"self":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts\/80949","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/comments?post=80949"}],"version-history":[{"count":0,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts\/80949\/revisions"}],"wp:attachment":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/media?parent=80949"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/categories?post=80949"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/tags?post=80949"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}