cheat sheet.docx - 1 Which one of the following statements...

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1. Which one of the following statements correctly states a relationship? A. Time and present value are inversely related, all else held constant. 1. As winner of a lottery, you can choose one of the following prizes. Rank them in your order of preference. The interest rate is 12%. a. $403,200 at the end of 5 years. N=5, I=12, FV=403,200, PMT=0 PV in year 0 = 228,786.51 b. $41,600 a year (starting from Year 1), for the next 10 years. N=10, I=12, PMT=41,600, FV=0 PV in year 0 = 235,049.28 c. $67,200 a year, starting from Year 5, and ending in Year 13. N=13-5+1=9, I=12, PMT=67,200, FV=0 PV in year 4 = 358,058.39 PV in year 0 = 358,058.39/1.12 4 = 227,552.58 2. Calculate the present value of the following cash flow streams. a. $4000 in Year 3 and $2000 in Year 6. Interest rate is 10%. CF0=0 CF1=0, F1=2 CF2=4000, F2=1 CF3=0, F3=2 CF4=2000, F4=1 I=10 NPV=4134.21 b. An annuity of $750 a year for 30 years, starting from Year 1. The interest rate is expected to be 6%. N=30, I=6, PMT=750, FV=0 PV in year 0 =10,323.62 c. An annuity of $750 a year for 30 years, starting from Year 1. The interest rate is expected to be 10% for the next 20 years and 14% thereafter. Due to the change in interest rate, essentially we have two annuities: one from year 1 to 20 with r=10%, and the other from year 21 to 30 with r=14%. N=20, I=10, PMT=750, FV=0 PV (of annuity from year 1 to 20) in year 0 = 6385.17 N=10, I=14, PMT=750, FV=0 PV (of annuity from year 21 to 30) in year 20 = 3912.09 N=20, I=10, PMT=0, FV=3912.09 PV (of annuity from year 21 to 30) in year 0 = 581.51 3. A factory costs $400,000. It will produce and inflow after operating costs of 100,000 in year 1, $200,000 in year 2, and $300,000 in year 3. The opportunity cost of capital is 12%. Should you invest in the factory? Calculate the Net Present Value of this investment.
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