Problem_Set_1 - price of oil is \$14 per barrel 4 Sam is a...

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Problem Set 1: Time Value of Money 1. A new factory will produce an inflow after operating costs of \$170,000 a year for 10 years. The opportunity cost of capital is 14% (a) What is the PV of the factory? (b) What will the factory be worth at the end of five years? 2. Siegfried Basset is 65 years of age and has a life expectancy of 12 years. He wishes to invest \$20,000 in an annuity that will make a level payment at the end of each of the next 12 years. If the interest rate is 8%, what income can Mr. Basset expect to receive each year? 3. An oil well now produces 100,000 barrels per year. The well will produce for 18 years more, but production will decline by 4% per year. Oil prices, however, will increase by 2% per year. The discount rate is 8%. What is the PV of the well’s production if today’s
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Unformatted text preview: price of oil is \$14 per barrel? 4. Sam is a manager who earns \$50,000 this year. He expects his wage to increase by 4% each year. He plans to retire in 20 years, and he wishes to accumulate \$300,000, in real terms, when he retires. Assuming interest rate is 5% and inflation is 2%, calculate: (a) The amount he needs to save if he wishes to save a constant dollar amount for the next 20 years. (b) The fraction of income he needs to save if he saves a constant fraction of his income each year. Ignore the effect of all taxes. 5. You can invest in a project that pays you \$1 at the end of 1 year, \$2 at the end of two years, etc., until paying \$10 at the end of 10 years. The opportunity cost of the project is 15%. How much are you willing to invest in such a project today?...
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