1.

Price after 4 years = 100 * [ 1 + (5/100)]^4 = \$121.55.

2.

Year 1: 200(1.07)^1 = \$214

Year 2: 200(1.07)^2 = 229

...

Year 5: (500+200)(1.07)^5 = \$981

3.

Because all cash flows inflate at the general inflation rate, the estimated cash flow is in real dollars.

NPW can be worked using the estimated return and the real MARR.

NPW = -1000 + 200(P/A, 0.1, 5) + 500(P/F, 0.1, 5) = \$68.

The ROR of the cash flow is 12.2% and we compare it with the real MARR.

With either method, the investment should be accepted.

4.

Since the cash flow does not change with inflation, the estimated amounts are in actual dollars. To compute the present worth, use an interest rate of 17.7%.

NPW = -1000 + 200(P/A, 0.177, 5) + 500(P/F, 0.177, 5) = -149.

Reject the project.

The ROR of the actual-dollar cash flow is still 12.2%, but we must compare it with the actual-MARR or 17.7%. Of course, we again reject the investment.

5.

In actual dollars the cash flows are as follows.

 Year BTCF Depr. Tax. Inc. Tax ATCF 0 -1000 1 214 100 114 46 153 2 229 100 129 52 147 3 245 100 145 58 140 4 262 100 162 65 135 5 281 100 140 72 129 5 Salvage 701 BV = 500 201 81 385

6.

The SYD method because it provides more depreciation in the earlier years when the value of the depreciation is greater.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.