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fin1ans02spr09

# fin1ans02spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Solution Set 2: Time Value Development Throughout this key, Annuity Factors and Discount Factors may be written: AF ( T, r %) = 1 r 1 - 1 (1 + r ) T , and DF ( T, r %) = 1 (1 + r ) T . A MC 1. If the 4-year discount factor is 0.889 what is the 3-year rate of interest? No more than 4% if it were, what would we get?? 2. If the 2-year discount factor is 0.900 and the 3-year discount factor is 0.772, what is the present value of a 3-year annuity of \$1 a year? Can’t say — there’s no way to discount the first payment 3. Michael Parsnip has just taken out a \$100,000 mortgage at an interest rate of 8%. If the mortgage calls for 20 equal annual installments, what is the amount of each installment? \$10,185 4. See question number 3 – What is the value of the mortgage (in second year dollars) after the payment of the second annual installment? \$95,453 [subtract the PV of two payments, then advance that balance two years] 5. You own an office building. A fair rent for this building next year would be \$100,000 and you expect that thereafter rents will increase indefinitely by 5% a year. Somebody has expressed an interest in renting the building at a fixed annual rent for 20 years. If the cost of capital is 15%, what would be a fair (i.e. equivalent) rental for 20 years? \$160,000 [current value = 100 , 000 . 15 - . 05 = \$1 , 000 , 000 ] Solve: NewRent × AF(20 yrs, 15%) = \$1 , 000 , 000 \$159 , 761 1

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6. Suppose you have just won the lottery and must choose one of the following (guaranteed) payoffs.
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fin1ans02spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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