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CH04Problems - Understanding Financial Management A...

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1 Understanding Financial Management: A Practical Guide Problems and Answers Chapter 4 Time Value of Money Note: You can use a financial calculator to check the answers to each problem. 4.2 Future Value of a Present Amount 1. If an investor deposits $100,000 today, how much will she have 10 years from today if she earns an annual interest rate of (A) 6%, (B) 8%, and (C) 10%? 4.3 Present Value of a Future Amount 2. What is the present value of a $750,000 payment that is expected to be received 20 years from today assuming an annual discount rate of (a) 6%, (b) 8%, and (c) 10%? 3. To settle a legal dispute, Lemon Inc. has agreed to pay damages to a competitor of $1.25 million one year from today, $1.5 million two years from today, and $1.75 million three years from today. At a discount rate of 6%, what is the present value of the settlement payments? 4.4 Future Value of an Annuity 4. Janzen Corp plans to deposit $2 million at the end of each of the next 15 years into a sinking fund account in order to have sufficient funds to retire a large bond issue. If Janzen can earn 8% per year on these funds, how much will the firm have in the sinking fund account 15 years from today? 5. To fund a future large capital expenditure, Lexor Inc. deposited $1 million today and plans to also deposit $500,000 at the end of each year for the next eight years. If Lexor can earn 9% annual return on these deposits, how much will the firm accumulate eight years from today? 4.5 Present Value of an Annuity 6. Compute the present value of 20-year annuity with annual payments of $20,000 using a discount rate of 8%. A. Assume payments occur at the end of each year. B. Assume payments occur at the beginning of each year.
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2 7. Xylar Company promises to pay a retiring employee $10,000 at the end of each year for the next four years followed by $15,000 at the end of each year for six more years. What is the present value of these future cash flows assuming a discount rate of 9%? 4.6 Present Value of a Perpetuity 8. Infinity Computer Inc. has just issued a preferred stock with no maturity that promises to pay dividends of $80 a year. If investors require a 10% rate of return, what is the present value of these future dividend payments? 4.7 Compounding Frequencies 9. A small firm has recently invested $50,000. If the firm expects to receive a return of 10% per year, compounded semi-annually, on this investment, what will be the future value of the investment five years from today? What if interest is compounded quarterly?
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