Capital Budgeting Essay

FIN 422 ASSIGNMENT 1 Due at 3:00 p.m. on Thursday, January 28, 2010. Instructions: 1. Attach a covering page to the front of your assignment giving your name, course number, section number (B1 or B2), and instructor’s name. 2. Hand in your assignment at the assignment drop-off box located outside the General Office on the third floor of the School of Business building. Be sure to place your assignment in the slot that is allocated for the class (FIN 422 B1 or FIN 422 B2). 3. Do not write down a single number solution to a question. Show your work, that is, show the important elements of your solution. 4. In an effort to reduce round-off error, carry any calculations to at least four decimal places. Note: Assignments handed in after 3:00 p.m. on the due date will not be accepted. ____________________________________________________________

____________ 1. [4] Fifth edition of RWJR, #4.5, page 93 Further question: (d) If Ms. Fawn wishes to consume the same quantity in each period, should she borrow or lend in the current period? By how much? 2. A capital investment project is expected to produce an after-tax net cash flow of $1,200 in one year. After-tax net cash flows are then expected to grow at a rate of 4% per year for 7 years, ending 8 years from today. In each year after that in perpetuity, after-tax net cash flows are expected to grow at a more sustainable rate of 2% per year. The project’s cost of capital is 15%. (a) [2] What is the terminal value of the project at the end of year 8? Terminal value at the end of year 8 is the value at that time of the after-tax net cash flows that the project is expected to provide after that date. (b) [2] What is the net present value of the project if it will require an initial outlay of $10,000? 3. [10] It is January 2010. Mr. Norton owns and operates a small-appliance repair shop. The shop rents space in a building and is quite busy. It generates after-tax net cash flows of $50,000 annually. Mr. Norton is considering...