Time value of money Basics – review Solutions 1.You will receive $10,000 in 15 years. If the discount rate is 18% compounded quarterly, the present value is closest to: a.$0.48 b.$712.89c.$835.16 d.$50,916 ()415EAR(1.18 / 4)119.251860%10,000PV$712.891EAR=+−===+2.Assume an investment that costs $50,000 will pay $5,000 per year for the first 5 years and $20,000 per year for the next 3 years. If the hurdle rate is 8%, should you invest in the project? a.Yes, the IRR of 9.93% is greater than the hurdle rate of 8%b.No, the IRR of 9.93% is greater than the hurdle rate of 8% c.Cannot make recommendation without having the appropriate discount rate. 3.The bank has provided you with quotes on two products: product 1 promises a rate of 8% compounded monthly while product 2 promises you 4% compounded quarterly. The effective annual rate for each product is closest to: Product 1 ; Product 2 ()()12142EAR1.08 /1218.30%EAR1.04 / 414.06%=+−==+−=1
has intentionally blurred sections.
Sign up to view the full version.