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are171a-homework-1

# are171a-homework-1 - Finance Homework 1 A RE 171A Winter...

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ARE 171A Finance Homework 1 Winter 2010 A. Havenner Ten problems on two pages. Show your work. Box your answers prominently. Problems: 1. Compute the present value of a. \$174,312 paid 3 years from now discounted at 3% annually b. \$234,073 paid 11 years from now discounted at 3.58% annually 2. Compute the future value of \$10,000 compounded annually for a. 5 years at 7% b. 10 years at 7% c. 20 years at 7% 3. Table A.3 in the text gives the future value of \$1 at the end of T periods, (1 + r)T. It is often convenient to know how long it takes to double the value at a given rate, or what rate is required to double the value in a given time. There is a famous approximation that says the value will double when the rate times the time (in years) is x. What is x? 4. Georgi G. is considering the purchase of a local bank in receivership. He thinks he can resurrect it if he puts \$100,000 per year in at the end of each of the first 5 years. He plans to sell it for \$1,000,000 at the end of the sixth year. The market interest rate is 11 % for assets of comparable risk, which is the same as Georgi's discount rate.

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