1. (6) Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an initial investment of $1000 plus an additional investment at the end of the second year of $5000. What is the NPV of this opportunity if the cost of capital is 2% per year? Should Marian take it?NPV = \frac{4000}{1.02}+\frac{4000}{1.02^{2}}+\frac{4000}{1.02^{3}}-\frac{5000}{1.02^{2}}-1000 = 5,729.69 Since the NPV>0 , Marian should take it.

2. (7) Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years and your cash flows from the contract would be $5 million per year. Your upfront setup costs to be ready to produce the part would be $8 million. Your cost of capital for this contract is 8%.

(a) What does the NPV rule say you should do? NPV = PV\,of\,cash\,flows-initial\,investment = 4,885,484.94>0 I should accept the contract.

(b) If you take the contract, what will be the change in the value of your firm?The change will be $4,885,484.94 in favor

3. (10) FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 per year for ten years. The cash inflows begin at the end of year 7.

(a) Assuming the cost of capital is 10%:

i. Calculate the NPV of this investment opportunity. Should the company make the investment? NPV = PV\,inflows-PV\,outflows = 1,040,534.383-871,052.1399 = 169,482.24 Since NPV>0, the company should make the investment

ii. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. Setting the NVP=0 and using Excel, we get