Capital Budgeting Quiz

1. What is the present value of a fund that earns 18% on its balance each year, from which $10,000 must be paid a year for 5 years, after which the balance of the fund will be zero?

2. If we invest $20,000 in a company that earns 8% per year on invested capital, and if they reinvest the earnings, how much is the investment worth at the end of 10 years?

3. A company can invest in a project that will raise its revenues by $7,000 per year after taxes. The project costs $30,487.10 initially and has an anticipated life of 6 years. If the company can earn 12% after taxes on capital invested in other projects, how much would the firm lose if it invested in the proposed project?

4. Find the payback period and the internal rate of return for the project described in problem 3.

5. It is desired to repay a loan of $20,000 in 12 equal annual installments, where the loan earns interest at the rate of 10% per year. How much should be paid each year?

6. The US EPA has determined that cleaning up the local watershed so it will meet healthy water standards will cost $300 million. They support their claim for the need to do this project by saying that the economic value of the healthy water to the citizens in the area is $15 million dollars per year in lower health costs, recreation, and quality of life. These benefits are expected to continue for 50 years. The opportunity cost on government money is normally the current rate of treasury bills which is 3%/year. Using Benefit/Cost Analysis determine if this use of government money makes sense. What is the minimum amount of annual benefit that is needed to justify this spending?

7 Compute the present value of $10,000 to be received in 30 years, if interest of 8% per year is compounded (a) annually, (b) quarterly. How do you explain the difference in your results?

8. A department store offers the following credit terms on a new appliance "slashed" to a price of $420: only $40 down, and the balance in 24 monthly installments of $25. What monthly interest rate is the company implicitly charging its credit customers?