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MGMT E-2000 fall 2014




Question;MGMT;E-2000;Fall;2014;Problem Set 3;(Due;Tuesday, Oct. 14);(100;pts.);For;all problems involving computation, you must show your work to receive any;credit. Two points will be deducted for;arithmetic errors, if all other components of your answer are correct.;1. (10 pts.);Find the future value of;$500, invested at 6% annual interest, compounded monthly, for three years?;2. (15 pts.);Find the present value of;$374, paid exactly nine years from now, if the required rate of return is 9%.;3. (15 pts.);You?re saving for your;daughter?s college expenses. She?s now;seven years of age, and you assume she?ll start college at age eighteen. You figure that the total for four years of;college will be $150,000. If you can;earn 2% interest on a college savings account, how much will you need to put in;the account now to have $150,000 when your daughter starts college?;4. (15 pts.);If the present discounted;value of $139 received a year from today is $125, what is the discount rate?;5. (20 pts.);A factory costs;$800,000. You reckon that it will;produce an inflow after operating costs of $170,000 a year for 10 years. If the opportunity cost of capital is 14%;what is the net present value (NPV) of the factory?;6. (25 pts.);After graduation;from Harvard Extension, you decide to stay in the Cambridge area and start your;own business. You think you see a couple;of opportunities.;Knowing;first-hand the pressure Harvard students are under, you consider opening a;business that allows them to let off steam and get rid of their;aggression: A paintball center right in;The Square.;The cost of the;project would be $150,000, payable up front, while revenues are expected to be;$7,500 per year, forever.;a. (5 pts.);If the interest;rate on comparable assets is 4%, is this project worthwhile? Show your calculations.;b. (10 pts.);What is the;project?s internal rate of return (IRR)?;Show your calculations.;You are also;considering a second business opportunity;Supplying fish, fresh from the bottom of the Charles River, to Harvard;Dining Services, for the next three years in return for an up-front payment;from them of $15,000. You figure it will;cost you $5,000 a year in supplies to provide this culinary joy.;So, the revenue;and costs of the project can be summarized as follows;Immediate and;only revenue: $15,000;Costs in Year 1: $ 5,000;Costs in Year 2: $ 5,000;Costs in Year 3: $ 5,000;c. (10 pts.);Find this;project?s internal rate of return (IRR).;Show your calculations.


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