Assume that the real interest rate is 7%. The Present Discounted Value (PDV) of a financial investment with a $5,000 payoff 3 years from today is $Blank 1.

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$500 0 1 P = ? 2 3 i = 10% Compute the present value, Po = ? $500 4 5

2. Thomas is considering buying an artificial Christmas tree. The tree costs $285 and is expected to last six years. The alternative is to keep purchasing natural trees, which currently cost $35 (Christmas year 0) and are expected to increase $5 in price each of the subsequent years, e.g. +$40, +$45, +$50, etc. Note: Draw two cash flow diagrams for this problem. a. What decision would you advise regarding the two options? b. What additional information may be useful or necessary in order to make a decision? c. Which option is the better choice? Why?

2. A group of investors is planning to build an athletic equipment and apparel store in Saskatoon, close to a group of existing big box stores. The group spends $800,000 to buy the required land and to develop the parking lot. After completing these steps they terminate the project when they learn that another athletic store is going to be built close by. What option have the investors exercised? Three years later, the investors still own the land and improvements. How should they value these things if they decide at that time to complete the store as originally planned?

Assume that at the end of year 0 you invested $100,000 in an investment fund. Since then the annual returns earned by this fund have been as follows: End of Year 1 2 3 Observed Return A. $87,319. B. $90,973. C. $109,683. D. $114,015. 15.00% -40.00% 35.00% It is now the end of year 3 and you expect to earn the same average annual return that you earned over the three-year period above. Based on this expectation, the value of your original $100,000 investment at the end of year 4 will be closest to:

2. Time: Investment A: Investment B: Year 0 Year 1 Year 2 Year 3 Year 4 Discount Rate Year 5 $500,000 $500,000 -$1.5 million $300,000 $300,000 $300,000 8% -$1.3 million $500,000 $400,000 $300,000 $200,000 $100,000 7% An investor is considering the two investments shown above. Please calculate the NPV and IRR for both A and B. And what is the crossover point here?

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