$100 $114 =C3*(1+C9) $100 $88

$100

Question 1 - Present Value

Year 1 2 3 4 5
Cash Flow $780,000 $780,000 $780,000 $780,000 $780,000

Discount Rate 14.0% 14.0% 14.0% 14.0% 14.0%

PV $684,211 $600,185 $526,478 $461,823 $405,108
Total Present Value $4,068,570
Cost of Project $4,000,000
Should you Invest? Yes

Question 2 - Relative Cash Flow

Revenue $780,000
Expenses ($225,000)
Depreciation ($150,000)
Pre-Tax Income % $405,000
Taxes 40.0% ($162,000)
Net Income $243,000

Net Income $243,000

Depreciation $150,000
Cash Flow $393,000

Question 3 - Year 1 PV
FV PV
Year 1 $393,000 $347,788
Year 2 $291,000 $202,083
Year 3 $191,000 $110,532
Year 4 $306,000 $147,569
Year 5 $424,000 $170,396
Total $1,605,000 $978,368

No you should not purchase it because the sum of the present value of the cash flows ($978K) is lower than the cos

Question 4 - Project Assessment

Project A
Year 1 2 3 4 5
Cash Flow $5,000,000 $10,000,000 $10,000,000 $15,000,000 $15,000,000

1
Discount Rate 7.0% 7.0% 7.0% 7.0% 7.0%
PV $4,672,897 $8,734,387 $8,162,979 $11,443,428 $10,694,793
Total Present Value $43,708,484
Cost of Project $40,000,000
Should you Invest? Yes

Project B
Year 1 2 3 4 5
Cash Flow $5,000,000 $10,000,000 $15,000,000 $20,000,000 $20,000,000

Discount Rate 20.0% 20.0% 20.0% 20.0% 20.0%

PV $4,166,667 $6,944,444 $8,680,556 $9,645,062 $8,037,551
Total Present Value $37,474,280
Cost of Project $40,000,000 $2,525,720
Should you Invest? No

2
 =F3/(1+C9) PV x (1 + Rate)^ # of yrs = FV PV = FV/(1 + Rate)^ # of yrs

6 7 8 9 10
$780,000 $780,000 $780,000 $780,000 $780,000

14.0% 14.0% 14.0% 14.0% 14.0%

$355,358 $311,717 $273,436 $239,856 $210,400

Pre-Tax Income / EBT (Earning Before Taxes) / Taxable Income

Cash from Operations - cash in and out the door from actually doing what your business is supposed to be doing
Cash from Investing - cash in and out the door from investing for growth in your business (usually big assets that you will use o
Cash from Financing - cash in and out the door from money you get from financing sources (Equity - ppl that have ownership) &

flows ($978K) is lower than the cost of the investment ($4.0M)

3
4
d to be doing
g assets that you will use over many year - 10+ years)
ppl that have ownership) & (Debt - ppl that make loans to you)

5
6
Question 1 - Stock Price
Year 1 2 3 4 5
Dividend $0.52 $0.56 $0.61 $0.66 $0.72
% Growth NA 8.5% 8.5% 8.5% 8.5%

Discount Rate 12.0% 12.0% 12.0% 12.0% 12.0%

PV $0.46 $0.45 $0.44 $0.42 $0.41
Today's Stock Price $2.18

Question 2 - Option Value

Current Stock Price $123.13
Less: Strike Price ($80.00)
Net Gain per Share $43.13
Less: Cost of Option ($41.40)
Net Profit per Share $1.73

Question 3 - Cost of Capital

Real Risk-Free Rate Calculation
10-Year Bond 2.50%
Less: Rate of Inflation (2.54%)
Real Risk-Free Rate (0.04%)

Cost of Equity Calculation

Market Rate of Retun 5.00%
Less: Real Risk-Free Rate (0.04%)
Equity Risk Premium 5.04%
Beta 1.20
Beta Adjusted Equity Risk Premium 6.05%
Real Risk-Free Rate (0.04%)
Cost of Equity 6.01%

Question 4 - Min Rate of Return

Risk Premium 13.00%
Plus: Risk-Free Rate 7.00%
Min Accpetable Rate 20.00%

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Cost of Equity = Risk Free + Equity Risk Premium

Equity Risk Premium = (Market Rate - Risk Free) * Beta

Market rate 10%

Risk Fre 5%
Equity Risk Premium 5%

Beta is just how volatile you are relative to the market

5.0% (5.0%)
Beta - High Risk 2.0x 10.0% (10.0%)
Beta - Same Risk 1.0x 5.0% (5.0%)
Beta - Low Risk 0.5x 2.5% (2.5%)
Beta - Inverse Risk (1.0x) (5.0%) 5.0%

8
1. Liz should move her money to an IRA because the monthly pension is higher
than what she would make with a monthly annuity payout, which is $5,329.72.
She would also be able to avoid taxes.

2. The family should take the 15 year mortgage at 4.5% interest compared to
the 30- year mortgage at 4% interest because mathematically they will pay less
money and it will take less time with the 15 year plan, compared to the 30 year
plan.

30 year plan
-197361 -548.225
15 year plan
-135192 -751.0667

-62169
-202.8416666667