Questions for Case Study Four

Questions for Case Study Four

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1) You start working at age 20 and you plan to deposit $5,000 in a savings account every year for the next 45 years.

1. At the end of this time, how much money will you have if the interest rate is 5%?
2. You decide that’s not enough money. How much will you have to save every year if you wish to have $1,000,000 when you retire?

2) A firm must spend $10 million today on a project that is expected to bring in annual revenues of $1.5 million for the next 10 years (beginning at the end of year 1).

1. If the firm’s cost of capital is 5%, what is the NPV of this project?
2. If the firm’s cost of capital is 10%, what is the NPV of this project?
3. What is the internal rate of return?

3) Project C has an expected value of $500 and a standard deviation of 50. Project D has an expected value of $300 and a standard deviation of 10. Comment on the desirability of these projects.

4) The Widget Company has estimated the following revenue possibilities for the year:

Sales Probability

100 0.15

150 0.20

220 0.30

290 0.20

310 0.15

1. Find expected revenue.
2. Find the standard deviation.
3. Find the coefficient of variation.

5) The XYZ Company has estimated expected cash flows for 1996 to be as follows:

Calculate:

1. expected value
2. standard deviation
3. coefficient of variation
4. the probability that the cash flow will be less than $100,000

Category: Economics