Finance Boot Camp
TVM Competition Problems Solutions
1. Although appealing to more refined tastes, art as a collectible has not always
performed so profitably. During 2003, Sothebys sold the Edgar Degas bronze sculpture
Petite Danseuse de Quartorze Ans
at auction for a price of $10,311,500. Unfortunately
for the previous owner, he had purchased it in 1999 at a price of$12,377,500.What was
his annual rate of return on this sculpture?
N = 4, PV = -12,377,500, FV =10,311,500,
SOLVE I = -4.463
2. Investment X offers to pay you $4,000 per year for nine years, whereas Investment Y
offers to pay you $6,000 per year for five years. Which of these cash flow streams has the
higher present value if the discount rate is 5 percent?
If the discount rate is 22 percent?
Investment X: PMT = 4000, N = 9, I = 5, SOLVE
PMT = 4000, N = 9, I = 22, SOLVE PV= 15,145.14
Investment Y: PMT = 6000, N = 5, I = 5, SOLVE PV= 25,976.86
PMT = 6000, N = 5, I = 22, SOLVE PV=
3. The Perpetual Life insurance Co. is trying to sell you an investment policy that will
pay you and your heirs $15,000 per year forever. If the required return on this investment
is 8 percent how much will you pay for the policy? Suppose the Perpetual Life Insurance
Co. told you the policy costs $195,000, At what interest rate would this be a fair deal?
15,000/.08 = 187,500
15,000/I = 195,000,
SOLVE I = 7.6923
4. You’re trying to choose between two different investments, both of which have up-
front costs of $50,000. Investment G returns $85,000 in five years. Investment H returns
$175,000 in 11 years. Which of these investments has the higher return?
Investment G: PV = -50,000, FV = 85,000, N=5,