# Questions 1. Time Value of Money a. $1 today is worth more to you than $1 in one year. Why?

Questions1. Time Value of Money a.$1 today is worth more to you than $1 in one year. Why? b.What is the real future value of $10,000 which will sit in a savings account for 20 years, earning 4% interest compounded yearly during a period of 4% annual inflation? c.What is the present value of an annuity which makes its first payment in 3 years, makes a total of 10 payments of $10,000 each year with an overall discount rate of 7%? d.What is the PV of a perpetuity which pays $200 one year from today and then each year thereafter? Assume a discount rate of 8%. e.What is the nominal future value of $10,000 one year from today if it can be invested in a portfolio that expects to earn, in real terms, 4% per year with inflation of 3% per year? 2. Project Valuation and Analysis: Suppose a new machine costs $59,000 today. It will yield $11,000 in after-tax savings each year for 7 years and you sell the machine for $4,000 in the 7th year. (10 pts)a.Given an opportunity cost of capital of 8%, what is the NPV of this project?b.What is the IRR of this project? c.What is the payback period for this project? d.What is the discounted payback period for this project? e.What is the profitability index for this project? 3. WACC: Common stock of the company KewCo. has a beta of 1.3. Treasury Bills provide a return of 4% and the market risk premium is 16%. Suppose KewCo. total value is composed of 60% equity and 40% debt (by market value). Debt yields of 8%. There are no shares of preferred stock in circulation. Find the cost of equity capital for KewCo a.Suppose KewCo. has a total value, V of $1,000,000,000. If there are 15,000,000 shares of KewCo stock outstanding, what is the current price of a share of KewCo equity? b.What is the WACC if the firm faces an average tax rate of 40% c.Suppose KewCo is considering a project with an IRR of 12%, should it accept the project? Why or why not? d.Suppose KewCo is considering a product line that will provide expected new net cash flows of $100,000 per year for 4 years. What is the maximum amount KewCo would be willing to pay for this new product line today?

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