011022
1. How many years would be required to pay off a loan with the following characteristics?
PV $11,500
RATE 10.6%
PMT $1,600 (annual payments)
14.24278822
2. What is the annual payment required to pay off a loan with the following characteristics?
PV $14,700
RATE 10.0%
NPER 10 years
($1,537.87)
3. Why is FV not part of the calculations for either question 1 or question 2?
4. At what annual rate of interest is a loan with the following characteristics?
NPER 17 years
PMT $100,000
PV $1,000,000
7%
For questions 5-8, LGI’s cost of capital is 8%
5. LGI projects the following after-tax cash flows from operations from
its aging Bowie, Maryland distribution facility (which first went on line in 1953)
over the next five years. What is the PV of these cash flows?
Projected after-tax cash flows
Year (in $ millions)
1 (40) $(37.00)
2 (40) $(34.22)
3 (40) $(31.66)
4 (40) $(29.28)
5 (40) $(27.09)
6. LGI extended the analysis out for an additional 7 years, and generated the
following projections. What is the PV of these cash flows?
Projected after-tax cash flows
Year (in $ millions)
1 (40) $(37.00)
2 (40) $(34.22)
3 (40) $(31.66)
4 (40) $(29.28)
5 (40) $(27.09)
6 (40) $(25.05)
7 (40) $(23.17)
8 (40) $(21.44)
9 (40) $(19.83)
10 (40) $(18.34)
11 (40) $(16.96)
12 (40) $(15.69)
7. The CFO asked you to undertake a more detailed analysis of the plant’s costs, noting that while
it is convenient for making calculations when projections result in data that can be treated like an annuity,
this does not always represent the most accurate estimate of future results. What is the PV of these cash flows?
Projected after-tax cash flows
Year (in $ millions)
1 (40) $(37.00)
2 (50) $(42.78)
3 (55) $(43.53)
4 (60) $(43.92)
5 (70) $(47.40)
8. As part of a larger plan to sell off underperforming assets, LGI is considering selling the Bowie property
and using other existing facilities more efficiently. LGI received four preliminary offers from potential buyers for the Bowie
property. What is the PV of each offer?
PV of each offer (in $ millions)
Offer A $102.17 million, paid today $102,170,000.00
Offer B $19.85 million per year, to be paid over the next 8 years ($113.5961403)
Offer C $201.88 million, to be paid in year 8 373.6657909
Offer D $18.09 million per year, to be paid over the next 7 years and
a $53.05 million payment in year 8
9. From a profit maximizing point of view, which offer should LGI accept?
10. Define the term annuity in your own words. How might the concept of an annuity impact the process of
capital budgeting and new asset acquisition?
