Question

# Problem 1 1.Startup cost: \$10,000. The cash flows for Years 1 through 5 are estimated to...

• 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.

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

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