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Question 1168820: 1. Wen Seng operates an ice cream shop. He is trying to decide whether to expand his business to include ice cream cakes. He will need some additional space that will cost him $7,400 per year at the end of each year and some additional equipment that will cost $14,000 up front. The ice cream cakes will provide an extra income of $13,000 per year at the end of each year. The business is expected to last 25 years. The discount rate (or interest rate) for Wen Seng's new business is 6%. What is the Net Present Value of the ice cream cake project? (Assume there are no taxes.)
2. Yassein is looking to refinance his home because rates have gone down from when he bought his house 10 years ago. He started with a 30-year fixed-rate mortgage of $339,000 at an annual rate of 7.6%. He can now get a 20-year fixed-rate mortgage at an annual rate of 5.6% on the remaining balance of his initial mortgage. (All loans require monthly payments.) In order to re-finance, Yassein will need to pay closing costs of $4,200. These costs are out of pocket and cannot be rolled into the new mortgage. How much will refinancing save Yassein? (i.e. What is the NPV of the refinancing decision?)
3. Reggie has just taken over management of a family business. He wants to make sure that it makes financial sense to keep the business going. He could sell the building today for $610,000. Keeping the business going will require a $60,000 renovation now and will yield an annual profit of $72,000 for the next 25 years (for simplicity assume these occur at year end, beginning one year from now). The discount/interest rate is 6%. What are the NPV and IRR of this decision?
Thank you so much.
Answer by ikleyn(52776)   (Show Source):
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