SOFlWARE Written to accompany this text, DCF performs a discounted cash flow analysis of user-supplied cash flows. Output consists of six figures of investment merit, including NPV and IRR, a present value profile graph, and a cash flow diagram. For a complimentary copy see . com/higgins7 e. WEBSlTES A well-done, interactive lecture on the internal rate of return offered by the University of South Carolina. More than 20 years of Warren Buffett's legendary letters to shareholders, and an opportunity to purchase a Berkshire Hathaway golf shirt. Check out Buffett's "Owner's Manual," a succinct explanation of Berkshire's broad econoinic principles of operations. When I grow up, I want to write like Warren Buffett. PROBLEMS Answers to odd-numbered problems appear at the end of the book. For additional problems with answers, see . I. Answer the following questions assuming the interest rate is 9 percent. a. What is the present value of$1,000 in 6 years? b. What is the present value of $1,000 in 12 years? Why does the present value fall as the number of years increases? Chapter 7 Dzsro1111ud Cash Fltr,:-Trrbn1q11e, 2r1 c. How much would you pay for th · h . e ng t to rece $4 0 of year l , $2,000 at the end of y 2 ive , 00 at the end year 10? ear , and $10,000 at the end of d. How much would you pay for a 14_ ear . of $1,000 and a 6 percent coupon r ~ , ~0nd w_nh a pa~ value annually. a e. sume interest 1s paid e. How much would you pay for a share of referre . $7-per-share annual dividend forever? p d stock paying a f. What will be the value in 8 years of$! 000. d P 1 _ p , mveste today? (Hint· resent va ue -VF X Future value wh PVF. · I f fr ' ere 1s the present va ue actor om the appendix for the ap · • d . . propnate interest rate an nme penod. Thus, Future value= [l/PVFJ x p l . . resent value.) g. About 10w long w1ll 1t take for a $500 investme t t d bl · I ~ n o ou em va uer h. What will be the value in 20 years of $700 invested at the end of each year for the next 20 years? 1. A ~o~ple wishes to s~ve $200,000 over the ne>.t 18 years for their child s_ college education. What uniform annual amount must they deposit at the end of each year to accomplish their objective? j. What ren1rn do you earn if you pay $5,019 for a stream of$1,000 payments lasting 10 years? What does it mean if you paid less than $5,019 for the stream? More than $5,019? k. How long must a stream of $500 payments last to justify a pur-chase price of $5,555.56? Suppose the stream lasted only 7 years. How large would the salvage value (liquidating payment} have to be to justify the investment of$5,555.56? I. An investment of $1,800 today returns $200,000 in 50 years. What is the internal rate of return on this invesonent? m. A company is planning to set aside money to repay $120 inillion in bonds that will be coming due in 10 years. How much money would the company need to set aside at the end of each year for the next 1 O years to repay the bonds when they co1:1e due? How would your answer change if the money were deposited at the be-ginning of each year? . .
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- Winter '16