90.2K

Verified Solution

Link Copied!

Question 4 (25 points) Part A Suppose you want to buy a car and the car dealer offers you two different methods to settle the payment: Option one: You need to pay your car with cash $9,000 today Option two: You need to pay your car with four equal annual payments of $3,000, beginning two years from today Assuming the annual interest rate (APR) is 10%. Which payment method should you pick? Why or why not? (10 points) Part B Your study loan requires payments of $200 per month for the first year (12 payments) and payments of $400 per month during the second year (12 payments). The annual interest rate is 12% and payments begin in one month from now. What is the present value of this two-year loan? (5 points) Part C The Quick-Start Company has the following pattern of potential cash flows with its planned investment in a new cold weather starting system for fuel injected cars. The node in white presents the decision and the one in black indicates an output. The chance of success of the preliminary test is 60% and failure 40%, as shown in the diagram below. t=0 Cash Flow After Tax Invest $100,000,000 Success .60 Year's 2-5 $66,000,000/year Do Not Invest NPV =$0 Test Cost $20,000,000 Failure .40 NPV = 5-20,000,000 Do not test If the company has a discount rate of 17%, what is the NPV at time 0? Show all relevant calculations and comment briefly on your answer. (10 points)

Answer & Explanation Solved by verified expert

See Answer