BD_SM04 - Chapter 4 The Time Value of Money 4-1. 1 2 3 4 5...

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Unformatted text preview: Chapter 4 The Time Value of Money 4-1. 1 2 3 4 5 4000 1000 1000 1000 1000 1000 From the banks perspective the timeline is the same except all the signs are reversed. 4-2. 1 2 3 4 312 1500 1500 1500 1500 1500 From the banks perspective the timeline would be identical except with opposite signs. 4-3. a. Timeline: 1 2 5 2000 FV= ? 5 5 FV 2,000 1.05 2,552.56 = = b. Timeline: 1 2 10 2000 FV=? 10 10 FV 2,000 1.05 3,257.79 = = 16 Berk/DeMarzo Corporate Finance c. Timeline: 1 2 5 2000 FV= ? 5 5 FV 2,000 1.1 3,221.02 = = d. Because in the last 5 years you get interest on the interest earned in the first 5 years as well as interest on the original $2,000. 4-4. a. Timeline: 1 2 3 12 PV=? 10,000 12 10,000 PV 6, 245.97 1.04 = = b. Timeline: 1 2 3 20 PV=? 10,000 20 10,000 PV 2,145.48 1.08 = = c. Timeline: 1 2 3 4 5 6 PV=? 10,000 6 10,000 PV 8,879.71 1.02 = = 4-5. Timeline: 1 2 3 4 10 PV=? 10,000 Chapter 4 The Time Value of Money 17 10 10,000 PV 5,083.49 1.07 = = So the 10,000 in 10 years is preferable because it is worth more. 4-6. Timeline: 1 2 3 10 PV=? 100,000 10 100,000 PV= 74, 409.39 1.03 = 4-7. Timeline: Same for all parts 1 2 3 4 5 PV=? 350,000 a. 5 350,000 PV 350,000 1.0 = = So you should take the 350,000 b. 5 350,000 PV 238, 204 1.08 = = You should take the 250,000. c. 5 350,000 PV 140,657 1.2 = = You should take the 250,000. 18 Berk/DeMarzo Corporate Finance 4-8. a. Timeline: 18 19 20 21 25 1 2 3 7 3,996 FV=? 7 FV 3,996(1.08) 6,848.44 = = b. Timeline: 18 19 20 21 65 1 2 3 47 3,996 FV ? 47 FV 3,996(1.08) 148,779 = = c. Timeline: 1 2 3 4 18 PV=? 3,996 18 3,996 PV 1,000 1.08 = = 4-9. a. Timeline: 1 2 3 10,000 20,000 30,000 2 3 10,000 20,000 30,000 PV 1.035 1.035 1.035 9,662 18,670 27,058 55,390 = + + = + + = Chapter 4 The Time Value of Money 19 b. Timeline: 1 2 3 10,000 20,000 30,000 3 FV 55,390 1.035 61, 412 = = 4-10. Timeline: 1 2 3 1,000 1,000 1,000 First, calculate the present value of the cash flows: 2 3 1,000 1,000 1,000 PV 952 907 864 2,723 1.05 1.05 1.05 = + + = + + = Once you know the present value of the cash flows, compute the future value (of this present value) at date 3. 3 3 FV 2,723 1.05 3,152 = = 4-11. Timeline: 1 2 3 10-10,000 500 1,500 10,000 a. 2 10 500 1,500 10,000 NPV 10,000 10,000 471.70 1,334.99 5,583.95 2,609.36 1.06 1.06 1.06 = - + + + = - + + + = - Since the NPV < 0, dont take it. b. 2 10 500 1,500 10,000 NPV 10,000 10,000 490.20 1, 441.75 8, 203.48 135.43 1.02 1.02 1.02 = - + + + = - + + + = Since the NPV > 0, take it. 20 Berk/DeMarzo Corporate Finance 4-12. Timeline: 1 2 3 1,000 4,000 1,000 4,000 ( 29 ( 29 ( 29 2 3 4,000 1,000 4,000 NPV 1,000 1.02 1.02 1.02 1,000 3,921.57 961.17 3,769.29 5,729.69 = - +- + = - +- + = Yes, make the investment....
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BD_SM04 - Chapter 4 The Time Value of Money 4-1. 1 2 3 4 5...

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