Essay about Fin 515 Week 2

1226 Words Apr 12th, 2015 5 Pages
Chapter 4 (pages 132–136):
3. Calculate the future value of $2000 in
a. five years at an interest rate of 5% per year; FV5= 2,000*1.05^5=2, 552.56
b. ten years at an interest rate of 5% per year; and FV10= 2,000*1.05^10=3,257.79
c. five years at an interest rate of 10% per year. FV5=2,000*1.1^5=3,221.02
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?
The amount of interest is less in part a than in part b because in the last 5 years you get interest on the interest earned in the first 5 years as well as interest on the original $2,000.
4. What is the present value of $10,000 received
a. twelve years from today when the interest rate is 4% per year;
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Your daughter is currently 8 years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 3% per year, how much money do you need to put into the account today to ensure that you will have $100,000 in 10 years? PV=100,000/1.03^10=74,409.39
9. You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 5 years after the date of your retirement. Which alternative should you choose if the interest rate is
a. 0% per year; PV=350,000/1.0^5=350,000; therefore you should take the 350,000
b. 8% per year; PV=350,000/1.08^5=238,204; therefore you should take the 250,000
c. 20% per year?
PV=350,000/1.2^5=140,657; therefore you should take the 250,000

14. You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 1 year from now, $1,500 2 years from now, and $10,000 10 years from now.
a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity? NVP=-10,000+500/1.06+1,500/1.06^2+10,000/1.06^10 NVP=-10,000+471.70+1,334.99+5,583.95=-2,609.36 NVP is less than 0 therefore you shouldn’t take it.
b. What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it now? NVP=-10,000+500/1.02+1,500/1.02^2+10,000/1.02^10

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