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 1E A R =+ −= == + 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 a. 2.52% ; 1.17% b. 8.00% ; 4.00% c. 8.30% ; 4.06% d. 8.24% ; 4.07% 12 1 4 2 EAR 1 .08 /12 1 8.30% EAR 1 .04 / 4 1 4.06% 1
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4. An effective annual rate of 14% is closest to _________% compounded quarterly? a. 3.33% b. 3.50% c. 13.32% d. 14.00% e. 14.75% () 4 1 4 1 .14 1 4 1 .14 1 4 13.3198% x x x ⎛⎞ += + ⎜⎟ ⎝⎠ +− = = 5. A 15 year annuity pays $5,000 per year. If the discount rate is 6% per year, then the future and present values (respectively) are closest to: Future value ; Present value a. $48,561 ; $116,380 b. $116,380 ; $48,561 c. $116,380 ; $97,122 d. $232,760 ; $48,561 For both FV and PV: N=15, PMT = 5000, I/Y = 6 For FV Î remember to set the PV = 0 For PV Î remember to set the FV = 0 6. The XYZ Company is considering an investment which will pay $8,000 per year for the next 10 years and $18,000 in year 11. The investment will cost $25,000 today. If the discount rate is 14% compounded semiannually, the net present value (NPV) of the investment is closest to: a. $20,000 b. $21,000 c. $41,000 d. $43,000 e. $71,000 Cf0 = -25,000 CF1 = 8000; F1 = 10 CF2 = 18000 (note this cash flow occurs in year 11 not in year 10); F2 = 1 I = 14.49% NPV = $20,005.8877 2
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7. The ABC Company has borrowed $50,000 from the CDS Loan Company. ABC will repay the loan in 20 monthly payments of $3,000. The payments are due at the end of each month. The interest rate on this loan is closest to _________ compounded monthly.
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CH 3 Review Sol - Time value of money Basics review...

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