"Corporate Finance: The Core

Chapter 4:

The Three Rules of Time Travel

3. Calculate the future value of $2000 in

a. Five years at an interest rate of 5% per year.

b. Ten years at an interest rate of 5% per year.

c. Five years at an interest rate of 10% per year.

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

4. What is the present value of $10,000 received

a. Twelve years from today when the interest rate is 4% per year?

b. Twenty years from today when the interest rate is 8% per year?

c. Six years from today when the interest rate is 2% per year?

9. You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 five years after the date of your retirement. Which alternative should you choose if the interest rate is

a. 0% per year?

b. 8% per year?

c. 20% per year?

14. You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now.

a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?

b. What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it not?

19. What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per year?

Assignment #1: Financial Decisions

Read Problems 30 and 31 at the end of Chapter 4. Prepare a report (3-4 pages) with your conclusions; show calculations.

30. Your brother has offered to give you $100, starting next year, and after that growing at 3% for the next 20 years. You would like to calculate the value of this offer by calculating how much money you would need to deposit in the local bank so that the account will generate the same cash flows as he is offering you. Your local bank will guarantee a 6% annual interest rate so long as you have money in the account.

a. How much money will you need to deposit into the account today?

b. Using an Excel spreadsheet, show explicitly that you can deposit this amount of money into the account, and every year withdraw what your brother has promised, leaving the account with nothing after the last withdrawal.

31. You have decided to buy perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If you initially put $1000 into the bond, what is the payment every year?

Chapter 4:

The Three Rules of Time Travel

3. Calculate the future value of $2000 in

a. Five years at an interest rate of 5% per year.

b. Ten years at an interest rate of 5% per year.

c. Five years at an interest rate of 10% per year.

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

4. What is the present value of $10,000 received

a. Twelve years from today when the interest rate is 4% per year?

b. Twenty years from today when the interest rate is 8% per year?

c. Six years from today when the interest rate is 2% per year?

9. You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 five years after the date of your retirement. Which alternative should you choose if the interest rate is

a. 0% per year?

b. 8% per year?

c. 20% per year?

14. You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now.

a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?

b. What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it not?

19. What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per year?

Assignment #1: Financial Decisions

Read Problems 30 and 31 at the end of Chapter 4. Prepare a report (3-4 pages) with your conclusions; show calculations.

30. Your brother has offered to give you $100, starting next year, and after that growing at 3% for the next 20 years. You would like to calculate the value of this offer by calculating how much money you would need to deposit in the local bank so that the account will generate the same cash flows as he is offering you. Your local bank will guarantee a 6% annual interest rate so long as you have money in the account.

a. How much money will you need to deposit into the account today?

b. Using an Excel spreadsheet, show explicitly that you can deposit this amount of money into the account, and every year withdraw what your brother has promised, leaving the account with nothing after the last withdrawal.

31. You have decided to buy perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If you initially put $1000 into the bond, what is the payment every year?

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