03-PS1-PV_sol

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

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

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.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• 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.

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

• 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.

Dana University of Pennsylvania ‘17, Course Hero Intern

• 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.

Jill Tulane University ‘16, Course Hero Intern