You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now. What is the NPV of the opportunity if the cost of capital is 6% per year? Should you take the opportunity? What is the NPV of the opportunity if the cost of capital is 2% per year? Should you take it now?
Finance Problems
- You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now. What is the NPV of the opportunity if the cost of capital is 6% per year? Should you take the opportunity? What is the NPV of the opportunity if the cost of capital is 2% per year? Should you take it now?
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You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate additional free cash flow of $500 per month. What is the payback period?
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You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table:
0
1
2
3
4
A
-100
25
30
40
50
B
-100
50
40
30
20
What are the IRRs of the two projects? If your discount rate is 5%, what are the NPVs of the two projects? Why do IRR and NPV rank the two projects differently?
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You buy 100 shares of Tidepool Co. for $40 each and 200 shares of Madfish, Inc., for $15 each. What are the weights in your portfolio?
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You are analyzing a stock that has a beta of 1.2. The risk-free rate is 5% and you estimate the market risk premium to be 6%. If you expect the stock to have a return of 11% over the next year, should you buy it? Why or why not?