BUSFIN 1030 – Introduction to Finance
Study Questions for Discounted Cash Flow Valuation
1.
You borrowed $50,000 from a financial institution for your college education 3 years ago. You are going
to pay the loan back 10 years after you graduate in one year. If the institution is charging 11% annual interest
on the loan, how much are you going to pay back? Calculate the simple interest and interest due to
compounding.
2.
You have $300,000. You are considering buying an apartment either in Pittsburgh or in Cleveland, either
of which you plan to sell in 20 years when you move to NYC. You expect the apartment in Pittsburgh to be
worth $1 million by then and the apartment in Cleveland to appreciate in value by 7% a year. As a rational
investor, which city should you prefer for your investment?
3.
What annual rate of return do you need if you invest $25,000 today and want to have $100,000 in 20
years?
4.
How long will it take to double your $50,000 investment today if you can earn 3.65% annual interest,
compounded daily? (There are 365 days in a year.)
5.
How much maximum would you be willing to pay for a security that offers $2,000 per month for the
next 5 years starting one month from today if the appropriate discount rate is 24%, compounded monthly?
6.
How much maximum would you be willing to pay for a security that offers its first cash flow of $2,000
in one month, after which the cash flows will grow by 0.5% a month for the next 5 years, if the appropriate
discount rate is 24%, compounded monthly?
7.
A security offers $2,000 per month forever starting one month from today and is currently priced at
$100,000. What is the monthly rate of return of this investment? Calculate the annual percentage rate (APR)
and effective annual rate (EAR).
8.
A security offers its first cash flow of $2,000 in one month, after which the cash flows will grow by
0.5% a month forever, and is priced at $100,000. What is the monthly rate of return of this investment?
Calculate the annual percentage rate (APR) and effective annual rate (EAR).
9.
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 Fall '08
 ZUTTER
 Annual Percentage Rate, Net Present Value, Internal rate of return

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