CORPORATE FINANCE I need help with this problem set. FINE 332 | November ’21 | All rights are reserved. The material contained herein i

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CORPORATE FINANCE I need help with this problem set. FINE 332 | November ’21 |
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical
University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval
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FINE 332
Corporate Finance I

Module 2 Problem Set
Discounted Cash Flow Valuations and Net Present Value

1. You are offered three annuities (these make equal payments over a specific period). Using an annual

4.2% discount rate, calculate each annuity’s price:

# Price ($) Payments ($/year) Life (yrs.)
1 ? 195 10
2 ? 200 (growing @1%/yr.) 10
3 ? 49 (growing @1%/yr.) Forever

2. You need to purchase a machine. It costs $75,000 and will expand cash flow by $10,000/year in year 1,

growing by 2.3% per year after that. The system will work for 10 years before you have to replace it. What
are the NPV (at a 4.2% discount rate) and IRR? The vendor offers you another machine costing $120,000
and lasting 15 years, with the same starting cash flow and a 2.5% growth rate. What are the NPV and the
IRR for it? Which machine should you purchase?

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

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. The first payment is made on July 1, 2011
c. Should Bobby take it? Why?

4. You are looking to lease a car and the dealer offers you:

Car price = $36,000 Monthly payments = $699
Down payment = $1,000 Lease term = 36 months
Purchase price at end of lease = $18,000
What is the implicit interest rate on the lease?

5. The Airbus A220 has the following R&D costs (all negative cash flows):

€300M (year 1) €200M (year 2) €100M (year 3)

Each plane will be sold for €45M – 20% down and the rest due on delivery one year later. The cost to
produce each plane is €35M – these costs are recognized on delivery. Sales says that you will sell 35
planes (year 4), growing by 5 planes per year. The last sale is made in year 10, when it is replaced by a
new model. What are the NPV (as of the beginning of year 1) and the IRR of the plane using a 10%
discount rate?

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