Question

• Problem 1
• 1.Startup cost: $10,000.
• The cash flows for Years 1 through 5 are estimated to be $2500, $4000, $5000, $3000, $1000.
• Discount rate = 6%.
• PV = C/(1+r)^t
• NPV = Add all PVs and subtract investment

• Problem 2
• 2. Startup costs in Year 0: $70,000.
• The cash flows for Years 1 through 4 are estimated to be $40,000
• Discount rate = 12%.

Show Present Value for each year

Show Net Present Value after 4 years as of today

• Problem 3
• Startup costs in Year 0: $10,000.
• The cash flows for Years 1 through 5 are estimated to be $4000 in a high-demand scenario, or $1000 in a low-demand scenario.
• The probabilities of a high- or low-demand scenario are both 50 percent.
• The product concept could be abandoned after Year 1, and the equipment could be sold for $4000.
• Discount rate = 6%.
• Show Expected Value of the project as of today.

Answer 1

Problem 1

(amount in $)

Year	Cash Flow	PVF @ 6%	PV
0	-10000	1	-10000
1	2500	.943	2358
2	4000	.890	3560
3	5000	.840	4200
4	3000	.792	2376
5	1000	.747	747
		NPV	3241

Problem 2

(amount in $)

Year	Cash Flow	PVF @ 12%	PV
0	-70000	1	-70000
1	40000	.893	35720
2	40000	.797	31880
3	40000	.712	28480
4	40000	.636	25440
		NPV	51520

Problem 3

Expected value of project as of today = [(4000*.50 +1000*.50) + 4000]*1/(1.06)1

= $ 6132.08