Question 1
Sorenson Stores is considering a project that has the following cash flows:
Year | Cash Flow |
0 | CF0 = ? |
1 | $3,000 |
2 | 4,000 |
3 | 2,000 |
4 | 3,500 |
The project has a payback of 2.8 years, and the firm’s cost of capital is 13%. What is the project’s NPV?
◦
$720.17
◦
$765.91
◦
$849.80
◦
$891.32
Question 2
Steve Hawke is a football star who has been offered contracts by two different teams. The payments (in millions of dollars) under the two contracts are shown below:
| Team A | Team B |
Year | Cash Payment | Cash Payment |
0 | $9.0 | $3.0 |
1 | 5.0 | 5.0 |
2 | 5.0 | 5.0 |
3 | 5.0 | 10.0 |
4 | 5.0 | 9.0 |
Steve plans to accept the contract that provides him with the highest NPV. At what discount rate would he be indifferent between the two contracts?
◦
9.66%
◦
10.65%
◦
11.35%
◦
12.55%
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