Problem 1:
Your brother has an idea for new website which would comprise only of paid links that would provide you money when someone clicks on links on your page (Google ad- words). To draw people to the website you will need to use money on paid search. You expect that you will need to spend $1000 subsequently year and the amount of spending will rise at 7% per year. You think you will get $300 of revenue on upcoming year and your revenue will grow at 11% per year. If the appropriate discount rate is 12%, what is the value of your brother’s website project?
Problem 2:
You’re considering investing in the start-up company which will not generate any dividends for 10 years. In ten years you will collect your first dividend check of $500. The dividends continue to arrive per year in perpetuity but will rise at a 5% annual rate. If the discount rate is 10% what is the value of your investment in start-up?
Problem 3:
Frankie Avalon would like for you to spend in a Churro cart. He tells you that the Cart will cost $7000. Throughout the first year of operation the cart will manufacture $800 of positive cash flow. Throughout the second year it will manufacture $1000 of cash flow. In the third year it will create $1150 of positive cash flow. After the third year the cash inflows will continue yearly and grow at a 5% annual rate. Frankie recognizes that you’re wary of Churro cart investments and pleads with you to consider that fact that cash flows are generated during the year. Hence he suggests that you value the cart assuming that the cash flows arrive in middle of the year. Find out the NPV of cart assuming cash flows come in the middle of year. How different is the NPV assuming middle of year vs. end of the year arrival? Suppose a discount rate of 11%.