Ann and Suzan are classmates who graduated with business degrees from Athabasca University. Ann inherited $50,000...

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Finance

Ann and Suzan are classmates who graduated with business degreesfrom Athabasca University. Ann inherited $50,000 from her father.She considers forming a 10-year business partnership with Suzan. Tojoin the partnership, Ann needs to invest $50,000. She believes herportion of the partnership will generate the following profits at adiscount rate of 4%.
Year Profits Present Value
1 $2000
2 $4,000
3 $6,000
4 $7,000
5 $8,000
6 $10,000
7 $12,000
8 $14,000
9 $17,000
10 $20,000
a) Calculate the Net Present Value (NPV).
b) Instead of forming a partnership with Suzan, Ann has theoption to buy a government bond. Ann expects to receive $150 peryear for each of the next ten years, and then receive a principlerepayment of $50,000. What is the value of a coupon bond that pays$150 per year for each of the next ten years? Assume the rate is5%.
c) Suppose Ann has the option to buy a new motor home for$25,000 and sell it for $15,000 after six years. Alternatively, shecan lease the motor home for $250 per month for six years andreturn it at the end of the six years. For simplification, assumethat lease payments are made yearly instead of monthly and pay atthe beginning of each year. If the interest rate, r, is 3.5%, is itbetter to lease or buy the motor home?

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3.8 Ratings (634 Votes)

a Net Present value sum of present value of cash inflows initial investmentSum of Present value of cash inflow Year 1 cashinflow1discount rate1 Year 2 cashinflow1discount rate2 Year 3 cashinflow1discount rate3 Year 10 cashinflow1discount rate10NPV 7622141 50000 See Answer

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Year	Profits	Present Value
1	$2000
2	$4,000
3	$6,000
4	$7,000
5	$8,000
6	$10,000
7	$12,000
8	$14,000
9	$17,000
10	$20,000