Waldo County

ECON

 6033

 Corporate

 Finance

 Case

 2

ECON

 6033

 Corporate

 Finance

  Case

 2

 Waldo

 County

  Cai

 Xinting

  3035159214

1. What

 is

 the

 project’s

 NPV,

 given

 the

 projections

 in

 Table

 1?

  Since

  the

  case

  just

  give

  us

  the

  projected

  revenues

  and

  costs

  in

  real

  terms

  and

  depreciation

  in

  nominal

 terms,

 we

 need

 to

 calculate

 the

 real

 discount

 rate

 R

 and

 then

 use

 real

 discount

 rate

 R

 and

  nominal

  discount

  rate

  r

  to

  discount

  total

  cash

  flow

  (without

  depreciation)

  and

  depreciation

  expenses,

  respectively,

  based

  on

  the

  rules

  that

  we

  need

  to

  use

  the

  nominal

  discount

  rates

  to

  discount

 nominal

 cash

 flows

 and

 use

 real

 discount

 rates

 to

 discount

 real

 cash

 flows.

  From

 the

 given

 information,

 we

 know

 that:

 inflation

 rate

  ������ = 2%;

 nominal

 discount

 rate

  ������ = 9%

  As

 a

 result,

 we

 get

 the

 real

 discount

 rate

  ������ = (Real)

  0

  Investment:

  -­‐Land

  -­‐Construction

  Operation:

  -­‐Rentals

  -­‐Share

 of

 retail

 sales

  -­‐Operating

 and

 Maintenance

 costs

  -­‐Real

 estate

 taxes

  Pretax

 income

  Taxes

 (t=35%)

  Net

 income

  Total

 cash

 flow

  2

  2

  -­‐4

  -­‐1.4

  -­‐2.6

  -­‐52.6

  2

  -­‐6

  -­‐2.1

  -­‐3.9

  4

  4

  3

  -­‐7

  -­‐2.45

 ...