Exercise 1

Your firm has identified three potential investment projects. The projects and their cash flows are shown here:
Project Cash Flow Today Cash Flow in one year
A -7.5 35
B 5 5
C 40 -25

Suppose all cash flows are certain and the risk-free interest rate is 8%
a. What is the NPV of each project?
PROJECT NPV
A 24.91 24.91
B 9.63 9.63
C 16.85 16.85

b. If the firm can choose only one of these projects, which should it choose?
Choose Project A because it has the highest NPV (24.91)

c. If the firm can choose any two of these projects, which should it choose?
Project A and Project C

d. What would happen to these NPVs if the interest rate would increase? And what would happen if we would postpone th
If the interest rate increase, the NPV of the project A and project B decrease but the project C increase
PROJECT NPV r
A 19.42
B 8.85
C 20.77

If we postpone the the second payment, the values of the project A and project B decrease and project C inc
PROJECT NPV
A 22.51
B 9.29
C 18.57

Exercise 2
Your computer-manufacturing firm must purchase 5500 keyboards from a supplier. One supplier demands an upfront pay
a. What is the difference in their offers in terms of $ today? Which offer should your firm take?

Data
quantity 5500
r 7%

Supplier A
Today 50,500
Price per keyboard payable 12.5
Payable in 2 years 68,750.0

Present Value 110548.9

They should choose the Supplir A, because there he is paying less money than in Supplier B.

b. Suppose your firm doesn’t want to spend cash today. How can it take the first offer and not spend $50,500 of its own ca
 Supplier A
Price per keyboard payable 12.5
He can pay all the amount on th
Payable in 2 years 68,750.0
second year

Present Value 60048.9

Exercise 3
Consider two securities that pay risk-free cash flows over the next two years and that have the current markets prices show

Security Price today Cash flow inCash

one year
flow in two years
B1 83 110 0
B2 88 0 110

Finding "r" for security B1 32.53%

Finding "r" for security B2 11.80%

a. What is the price of a security that pays cash flows of $110 in one year and $110 in two years?
We can put together Cash Flows that are on the same years
171
b. What is the price of a security that pays cash flows of $110 in one year and $550 in two years?

Security Price today Cash flow inCash

one year
flow in two years
B1 83 110 0
B2 440 0 550
We can put together Cash Flows that are on the same years
523

c. Suppose a security with cash flows of $55 in one year and $330 in two years is trading for a price of $300. Is the security

Security Price today Cash flow inCash

one year
flow in two years
B1 41.5 55 0
B2 264 0 330

We use the rates found at the beginning for getting the price today of each security
After that, we add the Prices
305.5
The security is underpriced because the real value of the security is 305.5 mean in the market is 300.

Exercise 4

Xia Corporation is an investment fund that consists of $100,000 in cash and three projects that it can undertake. The proje

r 10%
Project Cash Flow TodayCash flow in one year
A -20000 30000
B -10000 25000
C -60000 80000

a. What is the NPV of each project? Which projects should Xia undertake and how much cash should it retain?
 Project NPV
A 7272.73
B 12727.27
C 12727.27

They should undertake the project A,B and C because have the positive NPV, and retain 10,000 for operatio

b. What is the total value of Xia (projects and cash) today?

Total NPV + 10,000 cash missing 42727.27

c. What cash flows will the investors in Xia receive? Based on these cash flows, what is the value of Xia today?

Cash flows generated by the three projects in year 1. The value of Xia today is the NPV of the 3 projects + 10,

d. Suppose Xia pays any unused cash to investors today, rather than investing it. What are the cash flows to the investors in
The cash that they are receiveng in year 0, that's the principal, they don't need to bring it to the present valu

e. Explain the relationship in your answers to parts (b), (c), and (d).
The value of Xia changes according to the change in cashflows. For example, if they decide to undertake som

Exercise 5

Suppose the cost of rebuilding the UU campus to make it student-proof was approximately $2 billion in 2018. At the time
Cost Amount r 2%
In 2018 $ 2,000,000,000.00
In 2019 $ 2,200,000,000.00

Present value of the 2019 cost $ 2,156,862,745.10

Cost of delay (PV 2019 - 2018) $ 156,862,745.10
 ows are shown here:

r 8%

happen if we would postpone the second payment with an additional year?

e but the project C increase
30%

oject B decrease and project C increase

supplier demands an upfront payment of $50,500 today plus $12.5 per keyboard payable in two years. Another supplier does not dem

Supplier B
Price per keyboard 24
Payable in 2 years 132000

Present Value 115293.9

an in Supplier B.

not spend $50,500 of its own cash today?

 He can pay all the amount on the
second year

the current markets prices shown here:

Cash flow in two years

Cash flow in two years

or a price of $300. Is the security underpriced or overpriced?

Cash flow in two years

mean in the market is 300.

s that it can undertake. The projects are risk-free and have the following cash flows:

ash should it retain?

V, and retain 10,000 for operations

value of Xia today?

is the NPV of the 3 projects + 10,000 cash = 42727.27

the cash flows to the investors in this case? What is the value of Xia now?
eed to bring it to the present value. With this money they can use for invest in different options with the same level of risk.

e, if they decide to undertake some projects or pay to investors the NPV are different.

y $2 billion in 2018. At the time, engineers estimated that if the project were delayed to 2019, the cost would rise by 10%. If the intere
her supplier does not demand an upfront payment but will charge $24 per keyboard, also payable in two years. Assume that both firms
e level of risk.

d rise by 10%. If the interest rate were 2%, what would be the cost of a delay in terms of dollars in 2018?
ars. Assume that both firms supply the same keyboard and no risks are involved in supplying the keyboards The risk-free rate is 7%.
The risk-free rate is 7%.