03-PS1-PV_sol

03-PS1-PV_sol - MIT Sloan School of Management J Wang...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
MIT Sloan School of Management J. Wang 15.407 E52-456 Fall 2003 Problem Set 1: Present Value Solution 1. (a) The NPV of the project is 10 t =1 170 , 000 / (1 + 14%) t - 800 , 000 = $86 , 739 . 66 (b) At the end of 5 years, there will be 5 more years of income from the project, therefore it will be worth 5 t =1 170 , 000 / (1 + 14%) t = $583 , 623 . 76 2. An annuity of $1 over the next 12 years is worth 1 8% [1 - 1 (1+8%) 12 ] = $7 . 536 Therefore, Basset can buy 2653.90 units of $1 annuity and receive $2563.90 every year. 3. Value of this year’s production = $1,400,000 The growth rate of profit = 1 . 02 * 0 . 96 - 1 = - 2 . 080% Using the annuity with growth formula, the PV of the oil well is 14 * 100 , 000 * 1 8%+2 . 080% [1 - ( 1 - 2 . 080% 1+8% ) 18 ] Therefore, PV of the well’s production is $11,508,076. 4. Sam wants to accumulate $300 , 000 * 1 . 02 20 = $445 , 784 . 22 in nominal term at the end of 20 years. PV of this amount is 168,011.38. (a) An annuity of $1 over the next 20 years is worth PV of 1 5% [1 - 1 (1+5%) 20 ] = $12 . 462 Therefore, he needs to save 168 , 011 . 38 / 12 . 462 = $13 , 481 . 67 every year. That is over 25% of his first year salary.
Image of page 1

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

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern