Assigment 4 Key

# Assigment 4 Key - Finance 300 Homework 4 Time Value of...

This preview shows pages 1–3. Sign up to view the full content.

Finance 300 Homework # 4 – Time Value of Money 1. Future Value of a Single Cash Flow or Lump Sum K-Fed needs your financial advice. He just got a \$100,000 divorce settlement and would like to invest it. You tell him that he should put his money into a Certificate of Deposit (CD) that pays 10% interest per year. Thus, How much should K-Fed obtain at the end of year 5? 1. Set up the timeline 2. Set up the formula FV N = PV(1+I) FV 5 = \$100,000 (1+.10) FV 5 = \$100,000 (1.610) FV 5 = \$161,051 K-Fed should get \$161,051 at the end of year 5. 2. Present Value of a Single Cash Flow or Lump Sum Beavis is your best friend. He was recently offered an investment that would pay him \$2,000 at the end of year 4. The interest rate quoted was 9% per year. What should be the most Beavis should pay for this investment, in other words, what is the present value of this investment? 1. Set up the timeline 0 1 PV: \$100,000 FV? 2 3 I=10% 4 5 0 1 PV? 2 3 I=9% 4 FV \$2,000 N 5

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2. Set up the formula PV N = FV (1+I) PV 4 = \$2,000 = \$2,000 = \$1,417.43 (1.09) 1.411 After you figured out the PV of this investment, Beavis tells you that the price of this investment is \$3,500. Do you recommend that he buys this investment? Explain (Note : you don’t need calculations here) No, this investment is only worth \$1,417.43 and this most anyone should pay for it. If you were to pay more than \$1,417.73 for this investment, you would be taking an inferior
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

Assigment 4 Key - Finance 300 Homework 4 Time Value of...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online