This assignment is in two parts, one is quantitative problem, the other a short paper. Please reference assignment instructions on attachment.

Part I: This part of the assignments tests your ability to calculate present value.

A. Suppose your bank account will be worth $7,000.00 in one year. The interest rate (discount rate) that the bank pays is 8%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 3%?

B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $4,000.00 in one year. Account B will be worth $9,600.00 in two years. Both accounts earn 5% interest. What is the present value of each of these accounts?

C. Suppose you just inherited an gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:

Year 1: $42,000,000

Year 2: $62,000,000

Year 3: $99,000,000

Compute the present value of this stream of income at a discount rate of 8%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this oil well at a 8% discount rate but you have to show how you got to this number.

Now compute the present value of the income stream from the gold mine at a discount rate of 6%, and at a discount rate of 4%. Compare the present values of the income stream under the three discount rates and write a short paragraph with conclusions from the computations.

Part II: Read the following three sample business plans:

Ice Dreams

R J Wagner & Associates Realty

Interstate Travel Center

Which of these three projects do you think should have the highest risk from the point of view of investors (potential providers of funds) and would therefore be evaluated using the highest discount rate? Which one do you think should have the lowest? Write a two page paper explaining your reasoning.

In your assessment of the business plans consider the possible risk of each plan. Risk is one of the main considerations when deciding whether a plan should be evaluated and discounted to present value using a high or a low discount rate.

Note: you are not expected to fully analyse the numbers and financial statements in these business plans. There are only forecasts and projections. Nobody really believes them anyway. Use your intuition rather than calculations to assess risk and potential of each of these plans.

Part I:Â This part of the assignments tests your ability to calculate

present value.

A. Suppose your bank account will be worth $7,000.00 in one year.Â The

interest rate (discount rate) that the bank pays is 8%.Â What is the

present value of your bank account today?Â What would the present value

of the account be if the discount rate is only 3%?

B. Suppose you have two bank accounts, one called Account A and another

Account B.Â Account A will be worth $4,000.00 in one year.Â Account B

will be worth $9,600.00 in two years.Â Both accounts earn 5%

interest.Â What is the present value of each of these accounts?

C. Suppose you just inherited an gold mine.Â This gold mine is believed

to have three years worth of gold deposit.Â Here is how much income

this gold mine is projected to bring you each year for the next three

years:

Year 1: $42,000,000

Year 2: $62,000,000

Year 3: $99,000,000

Compute the present value of this stream of income at aÂ discount rate

ofÂ 8%.Â Remember, you are calculating the present value for a whole

stream of income, i.e. the total value of receiving all three payments

(how much you would pay right now to receive these three payments in the

future). Your answer should be one number - the present value for this

oil well at a 8% discount rate but you have to show how you got to this

number.

Now compute the present value of the income stream from the gold mine at

a discount rate of 6%, and at a discount rate ofÂ 4%. Compare the

present values of the income stream under the three discount rates and

write a short paragraph with conclusions from the computations.

Part II:Â Read the following three sample business plans:

HYPERLINK "http://www.bplans.com/spv/3127/index.cfm?affiliate=sbm" t

"_blank" Ice Dreams

HYPERLINK

"http://www.bplans.com/Sample_Business_Plans/Real_Estate_Business_Plans/

Real_Estate_Brokerage_Business_Plan/executive_summary.cfm" t "_blank"

R J Wagner & Associates Realty

HYPERLINK "http://www.bplans.com/spv/3136/index.cfm?affiliate=sbm" t

"_blank" Interstate Travel Center

Which of these three projects do you think should have the highest risk

from the point of view of investors (potential providers of funds) and

would therefore be evaluated using the highest discount rate?Â Which

one do you think should have the lowest?Â Write a two page paper

explaining your reasoning.

In your assessment of the business plans consider the possible risk of

each plan.Â Risk is one of the main considerations when deciding whether

a plan should be evaluated and discounted to present value using a high

or a low discount rate.

Note: you are not expected to fully analyse the numbers and financial

statements in these business plans.Â There are only forecasts and

projections. Nobody really believes them anyway.Â Use your intuition

rather than calculations to assess risk and potential of each of these

plans.

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