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Session_04_HWSolution

# Session_04_HWSolution - MGMT640 Session IV Homework...

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MGMT640: Session IV Homework Solution Parrino & Kidwell: Chapter 5 & 6 5.1 Future value: Chuck Tomkovick is planning to invest \$25,000 today in a mutual fund that will provide a return of 8 percent each year. What will be the value of the investment in 10 years? Solution: 0 5 years ├────────────────────┤ PV = \$25,000 FV = ? Amount invested today = PV = \$25,000 Return expected from investment = i = 8% Duration of investment = n = 10 years Value of investment after 10 years = FV 10 \$53,973.12 = × = + × = 10 n 10 ) 08 . 1 ( 000 , 25 \$ ) 1 ( PV FV i 5.30 Patrick Seeley has \$2,400 that he is looking to invest. His brother approached him with an investment opportunity that could double his money in four years. What interest rate would the investment have to yield in order for Patrick’s brother to deliver on his promise? Solution: 0 4 years ├────────────────────┤ PV = \$2,400 FV = \$4,800

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Amount invested in project = PV = \$2,400 Expected return three years from now = FV =\$4,800 Investment period = n = 4 years To calculate the expected rate of return, we set up the future value equation.
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