Re: Finance Assignment

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PROBLEM 1                                                                                                                        

Find the following values for a lump sum:                                                                                                                            

– The future value of  $500 invested at 8 percent for one year                                                                                    

– The future value of $500 invested at 8 percent for five years                                                                                   

– The present value of $500 to be received in one year when the opportunity cost rate is 8 percent

– The present value of $500 to be received in five years when the opportunity cost rate is 8 percent

assuming:                                                                                                                           

a. Annual compounding                                                                                                                               

b. Semiannual compounding                                                                                                                     

c. Quarterly compounding

PROBLEM 2                                                                                                        

What is the effective annual rate (EAR) if the stated rate is 8 percent and compounding occur semiannually? Quarterly?                                                                                                                                                         

ANSWER                                                                                                                                             

PROBLEM 3                                                                        

Find the following values assuming a regular, or ordinary, annuity:                                                                          

– The present value of $400 per year for ten years at 10 percent                                                               

– The future value of $400 per year for ten years at 10 percent                                                                  

– The present value of $200 per year for five years at 5 percent                                                                 

– The future value of $200 per year for five years at 5 percent                                                                    

assuming:                                                                           

a. A regular or ordinary annuity                                                                

b. An annuity due                                                                                                                                           

ANSWER

 PROBLEM 4                                                                                                                       

Consider the following uneven cash flow stream:                                                                                                                                                                                                                                            

                Year       Cash Flow                                                                                           

                0              $0                                                                                          

                1              $250                                                                                      

                2              $400                                                                                      

                3              $500                                                                                      

                4              $600                                                                                      

                5              $600                                                                                      

                                                                                                                               

a. What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent?                                                                                           

b. Add an outflow (or cost) of $1,000 at Year 0. What is the present value (or net present value) of the                                                                                                                  

    stream?                                                                                                                                                                                                                          

ANSWER             

PROBLEM 5                                                                                                                        

Consider another uneven cash flow stream:                                                                                                                      

                                                                                                                               

                Year       Cash Flow                                                                                           

                0              $2,000                                                                                  

                1              $2,000                                                                                  

                2              $0                                                                                          

                3              $1,500                                                                                  

                4              $2,500                                                                                  

                5              $4,000                                                                                  

                                                                                                                               

a. What is the present (Year 0) value of the cash flow stream if the opportunity cost rate is 10 percent?                                                                                                                

b. What is the value of the cash flow stream at the end of Year 5 if the cash flows are invested in an                                                                                                                       

    account that pays 10 percent annually?                                                                                        &nb