Corporate Finance Excel week 2

March 2021 | MGMT 332 | College of Business |worldwide.erau.edu

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MGMT 332 Corporate Finance I

Module 2: Discounted Cash Flow Valuations and Net Present Value

Problem Set 2 – Discounted Cash Flow Valuation and Net Present Value 1. You are offered three annuities for purchase. Annuities make payments over a specified

amount of time. Using the NPV (6.1% discount rate) and IRR methodologies, calculate which annuity is the best choice:

# Cost($) Payments ($/yr) Life (yrs.)

1 5,055 1,005 4 2 6,750 1,890 (growing @0.3%/yr.) 5 3 50,000 830 (growing @4.5%/yr.) Forever

2. You purchase a new software for your firm. It costs $18,000 and will expand your business cash flow by $5,000/year in year 1 growing by 2.5% per year after that. The system will work for 4 years before you have to replace it.

What are the NPV (use a 6% discount rate) and IRR?

The vendor offers you another software costing $26,000 and lasting 8 years, with the same cash flows and growth rates.

a. What are the NPV and the IRR in this case? b. Should you get it?

3. You are looking to buy a rental property. After doing some analysis, you figure that this opportunity presents the following cash flows:

Up-front cost = $655,000 Yearly cash flows (growing at 2%/year forever) = $21,000 Your opportunity cost of capital for this investment is 6%

a. What are the NPV and IRR? b. Should you buy it?

4. Read Why the Mets Pay Bobby Bonilla $1.19 Million Every July 1

Run the numbers: a. Use July 1, 2011, to calculate the future value of the $5.9M owed on July 1,

2000. b. Use July 1, 2011, to calculate the present value of the 25 yearly payments of

$1,193,248.20. c. If you were his investment advisor, what would you have advised him when the

Mets made the offer?

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5. The Airbus A230 has the following investments in R&D (in millions, all negative cash flows):

$150M (year 1) $250M (year 2) $300M (year 3)

Each plane will be sold for $24.5M - 10% down and the rest due on delivery two years later. The cost to produce each plane is $21M - these costs are recognized on delivery. The Sales and Marketing Department says that you will sell 25 planes (year 4), 30 planes (year 5), 50 planes/year (years 6-9), and 55 planes (year 10).

What are the NPV (as of the beginning of year 1) and the IRR of the plane using a 6.6% discount rate?