103-su18-ps1 (Protected View)-Mcrosolt Word non commercial use Fout PO nore deta

Question

103-su18-ps1 (Protected View)-Mcrosolt Word non commercial use Fout PO nore detals. Enable Editing CON5103 Chapter 1 Practice Set Due by June 10 at 11:55PM Central Time Williams You must upload your answers by the deadline if you wish to receive an answer key! Late submissions receive no answer key. (Question 3 is adapted from textbook chapter I) 1. A firm can spend $1,000,000 today on a project that will generate $2,000,000 of revenue exactly 10 years from now. Should the fim do this project? Evaluate using the net present value (NPV) criterion and a discount rate of 7%. (This is a simplified question that you must answer, the answer .insufficient information-is unacceptable.) and operates a golf driving range ou land that he also owns Last year his accountant calculated 2. Biff owns that his driving range makes $$0,000 profits per year. Last year a property maiagement company offered to lcase Bift's land fiom him for $80,000 per year Calculate the ssonomic profits of Bifts driving range last yea If the property manages offers the same land lease deal to Biff this year, should he take the up ALL TOUCH ALL-IN- YOUR FAMILY NEEDS

Explanation / Answer

Cost of project = $1,000,000

Revenue from project = $2,000,000

Time period = 10 years

Discount rate = 7%

In order to evaluate the project using NPV criterion, we have to calculate the present value of cost and present value of revenue.

Since, cost is being incurred today.

So,

Present value of cost = $1,000,000

Present value of revenue = $2,000,000/(1+0.07)10 = $2,000,000/1.9671 = $1,016,725.13

Calculate the NPV of project -

NPV = PV of revenue - PV of cost

NPV = $1,016,725.13 - $1,000,000 = $16,725.13

The NPV of project is $16,725.13

The NPV is positive. When NPV of a project is positive, it should be undertaken.

So, the firm should do this project.

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