Question 1: On completion of MBA, Eddie and Mike were so pleased with the amount of helpful and interesting knowledge that they had learned that they convinced some friends who are wealthy alums to create a scholarship. The scholarship will permit three needy students to take the courses in perpetuity. The annual cost of tuition and books for the course is $2000. The university will earn 6% on the fund. The scholarship will be made by a single payment to the university from their friends.
A) How big must the payment be to fund the scholarship?
B) What amount would be required if the university could earn 9% instead of 6% per year on the funds?
Question 2: The Bulldog Company can purchase a Tractor for a $14,000 initial investment. The tractor will produce annual after-tax cash inflows of $4, 000 for the next 4 years.
A) What is the Net Present Value (or NPV) of the asset if the company’s required rate of return on these assets is 10%?
B) What would the maximum required rate of return (that is, closet whole-percentage rate) that the firm can have and still accept the asset? Discuss this finding in light of your response to (A) above.