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problem 1: You are considering investment in new sub-industry of interest to your firm. To understand the significance of terminal value assumptions you have decided to compute NPV under two different sets of assumptions. The project needs initial outlay of $200,000. Additionally, after-tax cash flows for years one through six will be $30,000 per year. The proper discount rate for this project is 11 percent. To deal with the projects terminal value you are considering two potential methods of modifying the end-of-year-six cash flow.

i. Assume the end-of-year 7 cash flow is 1 percent larger than the end-of-year-six cash flow. The cash flows will continue to grow in perpetuity at a stable rate of one percent thereafter.

ii. Assume the project can be liquidated at the end of year six (after receiving the end-of-year-six cash flow) to net an additional after-tax cash inflow of $70,000.

a. Compute the project NPV assuming i.

b. Compute the project NPV assuming ii.

c. Interpret your answers to a. and b. In your discussion, describe how the assumptions should coincide with management decisions.

problem 2: You plan on depositing $6,000 at the end of each year for 40 years in the retirement account that pays 6% interest. How much could you withdraw annually in equivalent starting of year amounts starting at the time you make your last deposit and continuing for a total of 20 years, supposing balances continue to earn 6% till withdrawn?

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M94017

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