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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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 Winter '08
 WHITNEY

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