CHAPTER 15
THE EFFECTS OF TIME AND RISK ON VALUE
Test Problems
1.
How much will a $50 deposit made today be worth in 20 years if the compound
rate of interest is 10 percent?
d.
$336.37
2.
How much would you pay for the right to receive $80 at the end of 10 years if you
can earn 15 percent interest?
b.
$19.77
3.
How much would you pay to receive $50 in one year and $60 in the second year
if you can earn 15 percent interest?
a.
$88.85
4.
What amount invested at the end of each year at 10 percent annually will grow to
$10,000 at the end of five years?
b.
$1,637.97
5.
How much would you pay for the right to receive nothing a year for the next 10
years and $300 a year for the following 10 years if you can earn 15 percent
interest?
a.
$372.17
6.
What is the present value of $500 received at the end of each of the next three
years and $1,000 received at the end of the fourth year, assuming a required rate
of return of 15 percent?
c.
$1,713.37
7.
If a landowner purchased a vacant lot six years ago for $25,000, assuming no
income or holding costs during the interim period, what price would the
landowner need to receive today to yield a 10 percent annual return?
c.
$44,289.03
8.
What is the present value of the following series of cash flows discounted at 12
percent: $40,000 now; $50,000 at the end of the first year; $0 at the end of year
the second year; $60,000 at the end of the third year; and $70,000 at the end of the
fourth year?
d.
$171,835.94
9.
Assume an incomeproducing property is priced at $5,000 and has the following
income stream (year 1, $1,000; year 2, $2,000; year 3, $3,000; and year 4,
$3,000). Would an investor with a required rate of return of 15 percent be wise to
invest at the current price?
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b.
No, because the project has a net present value of $1,954.91.
Study Questions
1. Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent for the
next 10 years.
The farmer has offered to pay $20,000 today or an annuity of $3,200 at
the end of each of the next 10 years.
Which payment method should Dr. Jackson accept
if his required rate of return is 10 percent?
Solution
:
Dr. Jackson should choose the payment method that maximizes his net present
value.
If he chooses the lump sum payment, the net present value is simply the $20,000
he will receive today.
If he chooses the annuity plan, the net present value will be only
$19,662.61.
N = 10
I = 10 %
PV =?
PMT = 3,200
FV = 0
Therefore, Dr. Jackson should choose the lump sum payment of $20,000.
2. You are able to buy an investment for $1,000 that gives you the right to receive $438
in each of the next three years.
What is the internal rate of return on this investment?
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 Spring '08
 PENG,LIANG
 Net Present Value

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