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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