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TVM and Capital Budgeting

Please can anyone take a shot at these questions.

Thanks.

#1. Sally Andrews salary next year is expected to be $40,000. Assume she expects her salary to grow at a steady rate of 4% per year for another 25 years. If the appropriate cost of capital (aka discount rate) is 9%, what is the PV today of Sally's future salary cashflow stream? [For simplicity, assume the salary amounts are at the end of each of the next 25 years.] Answer to nearest $1000.
a. 246,000
b. 247,000
c. 391,000
d. 553,000
e. 800,000


#2. You have the opportunity to buy a note for $10,000. The note is certain to pay $2000 at the end of each of the next 10 years. If you buy the note, what rate of interest will you receive on this investment (to nearest %)
a. 15%
b. 100%
c. 20%
d. 16%
e. insufficient information to compute


#3. Capital City Manufacturing is considering a new equipment purchase that would replace some existing equipment. The old equipment has a Book Value (BV) of $400 thousand and RDP estimates that the equipment could be sold for ONLY $150 thousand. What is the After Tax Salvage Value (ATSV) of the old equipment that RDP should use in their capital budgeting analysis? Assume the tax rate = T= 35%.
a. 0, since the sale of old equipment has nothing to do with analysis of new equipment being purchased
b. 87.5 thousand
c. 62.5 thousand
d. -250 thousand
e. 237.5 thousand


#4. If you earn a 10% nominal return on an investment, are you really 10% more wealthy?
a. No, because there may be inflation, which causes your real return to be less
b. No, because if inflation = 0, then your real return is less
c. Yes, because you really have 10% more dollars
d. Yes, because inflation does NOT effect your real wealth
e. Yes, because nominal returns are the returns widely published & quoted in the press

Answer to Q1: $552,679 I used excel to get the answer instead because I don't have a financial calculator yet. I did it the long way.

Correct me if I am wrong guys.

I put all CFs for yr 1- 25.
CF (1-25) grows at a rate of 4%.

Yr 1 = 40,000(1.04) = 41,600
Yr 2 = 41,600(1.04) = 43,264
.
.
.
Yr 25 = CF(yr 24)*(1.04)

I then discounted all CFs at a rate of 9% to get PV for each year.

Then add all PVs together to get total PV which is $552,679.

I tried to use the formula in cfa book but couldn't get the answer. So I'd like to know how if you know how. So please shed some light. Thanks.

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