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

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.

Decoâ€™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

â€“6,100

+2,100

+2,100

+2,800

0

B

â€“1,400

0

+1,000

+3,100

+4,100

C

â€“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.

â€œIf a firm uses a single cutoff period for all

projects, it is likely to accept too many short-lived projects.â€

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.

Decoâ€™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

$