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CH 3 Review Sol

CH 3 Review Sol - Time value of money Basics review...

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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. \$712.89 c. \$835.16 d. \$50,916 ( ) 4 15 EAR (1 .18 / 4) 1 19.251860% 10,000 PV \$712.89 1 EAR = + = = = + 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 ( ) ( ) 12 1 4 2 EAR 1 .08 /12 1 8.30% EAR 1 .04 / 4 1 4.06% = + = = + = 1

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