Question 1 – Present and Future Values a. A firm is expected to earn $100,000 pe

Question

Question 1 – Present and Future Values

a. A firm is expected to earn $100,000 per year for 5 years. If the annual discount rate is 10 percent, what is the present value of the firm? Show all work.

b. A firm is expected to earn $100,000 per year forever. If the annual discount rate is 10 percent, what is the present value of the firm? Assume no growth. Show all work.

Question 2 – Present and Future Values

Fred is considering the purchase of a lease that will allow him to operate a restaurant at the local airport for a period of five years. The lease will cost $32,000 annually along with monthly operation costs of 8,000. Fred anticipates monthly revenues of $16,000. Calculate the PV of the expected profits of the investment? Assume i = 0.05

Explanation / Answer

1.

a.

present value of the firm=100000/(1+10%)^1+100000/(1+10%)^2+100000/(1+10%)^3+100000/(1+10%)^4+100000/(1+10%)^5

=379078.68

the above is the answer

b.

present value of the firm=100000/10%=1000000

the above are the answers

we do only one question based on Chegg rule.

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