1. Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at

/in /by

1. Mr. Art Deco will be
paid $100,000 one year hence. This is a nominal flow, which he discounts at
an 8%
nominal discount rate:

PV

=

100,000

=

$

92,593

1.08

The inflation rate is 4%.

Calculate the PV of Mr.
Deco’s payment using the equivalent real cash flow and real discount
rate.
(You should get exactly
the same answer as he did.) (Do not round intermediate calculations.
Round your “Real cash
flow” and “Present value” answers to the nearest dollar amount
and
“Real discount rate” answer
to 2 decimal places.)

Real cash flow

$

Real discount rate

%

Present value

$

2. Consider the following information:

Cash
Flows, $

Project

C0

C1

C2

C3

C4

A

–6,100

+2,100

+2,100

+2,800

0

B

–1,400

0

+1,000

+3,100

+4,100

C

–3,900

+2,100

+3,000

+4,100

+6,100

a.

What is the payback
period on each of the above projects?(Round your answers to 2 decimal places.)

Project

Payback
Period

A

year(s)

B

year(s)

C

year(s)

b.

Given that you wish to use the payback rule
with a cutoff period of two years, which projects would you accept?

Project
A, Project B and Project C

Project
B

Project
A and Project C

Project
C

Project
A and Project B

Project
A

Project
B and Project C

c.

If you use a cutoff period of three years,
which projects would you accept?

1)
Project B and Project C

2)
Project A and Project C

3)
Project A

4)
Project A, Project B and Project C

5)
Project C

6)
Project A and Project B

7)
Project B

d.

If the opportunity cost of capital is 11%, which projects have
positive NPVs?

1)
Project A

2)
Project B and Project C

3)
Project A and Project C

4)
Project C

5)
Project A, Project B and Project C

6)
Project B

7)
Project A and Project B

e.

“If a firm uses a single cutoff period for all
projects, it is likely to accept too many short-lived projects.”
True or false?

True

False

f-1.

If the firm uses the
discounted-payback rule, will it accept any negative-NPV projects?

Yes

No

f-2.

Will it turn down
positive-NPV projects?

Yes

No

3.

Mr. Art Deco will be paid
$280,000 one year hence. This is a nominal flow, which he discounts at an 7%
nominal discount rate:

PV

=

280,000

=

$

261,682

1.07

The inflation rate is 3%.

Calculate the PV of Mr.
Deco’s payment using the equivalent real cash flow and real discount
rate.
(You should get exactly the same answer as he
did.) (Do not round
intermediate calculations.
Round your “Real
cash flow” and “Present value” answers to the nearest dollar
amount and
“Real discount
rate” answer to 2 decimal places.)

Real cash flow

$

Real discount rate

%

Present value

$

 
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