Part 7:
Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growth stream of cash flows. Cash flow at the end of the first year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5 percent.
- If the discount rate for this project is 10%, what is the project NPV?
- What is the project IRR?
Part 6:
Joe Downey is currently 65 years of age. He is currently drawing $20,000 a year out of his IRA. He expects to live to 100 and wants to know what he needs now to insure himself that he will be able to draw the $20,000 at the beginning of each year for the next 35 years. He believes the account will earn 6 percent compounded annually for the next 35 years. How much money does he need in his account today?
Part 5: Essay
Some suggest that a firm should seek to maximize the welfare of all its stakeholders, such as employees, customers and the community in which it operates. How would this objective conflict with the one of maximizing shareholder value? Do you believe such an objective is feasible?
Part 4:
Tom and Mary James just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. Tom normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average of 10 percent per year. Tom and Mary want to make sure their son has $100,000 for college. Consider each of the following questions.
a. How much does Tom have to invest in this mutual fund at the end of each year to have $100,000 in 18 years?
b. Tom’s father said he would provide for his grandson’s education. He puts $10,000 in a government bond that pays 3 percent interest. His dad said this should be enough. Do you agree?
c. If Mary has a savings account worth $50,000, how much she withdraw from savings and set aside in this mutual fund to have the $100,000 for her son’s education in 18 years?
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