Question

1. A project pays the investor $5 att1andt2. Fromt3on, the cash flow will increase by5%. For example, the cash flow att3is $5.25, and the cash flow att4is $5.5125. The rate of return is 15%. Please calculate the project’s present value.

2.  One project has three cash flows: att0, the initial investment cost is $150; att1, the project pays $121; att2, the project needs an extra investment $242; att3, the project pays $665.5. The project has a constant spot rate of return 10%. What is the present value of the project?

3.  A tall Starbucks coffee costs $1.65 a day. If the bank’s daily interest rate is 0.01%,compounded daily, and if the Starbucks price never changed, what would an endless, inheritable free subscription to one Starbucks coffee per day be worth today? [Hint: if you subscribe today, you can get your first coffee tomorrow.]

Answer 1

Question 1

Year	1	2	3
Cash flow	5.00	5.00	5.00
Terminal value calculation			=(5 * (1 + 5%)) / (15% - 5%)
Terminal value			52.50
Cash flow + Terminal value	5.00	5.00	57.50
Present value calculation	=5 / (1+15%) ^ 1	=5 / (1+15%) ^ 2	=57.5 / (1+15%) ^ 3
Present value	4.35	3.78	37.81
Total present value	45.94
Project present value	45.94

Please note i have answered first question as per policy. Thanks.