Corporate Finance

1. Dr. Oats, a nutrition professor, invests $80,000 in a piece of land that is expected to increase in value by 14 percent per year for the next five years. She will then take the proceeds and provide herself with a 10 year annuity, how much will this annuity be?

2. Rusty Steele will receive the following payments at the end of the next three years: $4,000, $7,000, and $9,000. Then from the end of the fourth year through the end of the tenth year, he will receive an annuity of $10,000. At a discount rate of 10 percent, what is the present value of all future benefits?

3. Hamilton Control Systems will invest $90,000 in a temporary project that will generate the following cash inflows for the next three years.

Year Cash Flow

1 $23,000

2 $38,000

3 $60,000

The firm will be required to spend $15,000 to close down the project at the end of three years.

If the cost of capital is 10 percent, should the investment be undertaken? Use the net present

value method.

A) Find the net present value of the investment described.

B) Calculate its profitability index.

4. Cellular Labs will invest $150,000 in a project that will not begin to produce returns until after the third year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual cash flow will be $40,000. If the cost of capital is 12 percent, should this project be undertaken?

A) Find the net present value of the investment described.

B) B) Hypothetically, if the investment described had an internal rate of return of 14%, what would its net present value be? Discuss your answer.