Chapter 2 how to calculate present value extra exercises

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FOUNDATION OF FINANCE – 702021 CHAPTER 2: HOW TO CALCULATE PRESENT VALUE

Question 1: In 1st March, 2014, Mr An deposits 100 millions VND and asks VCB to open a three - month saving account

The interest rate for saving account is 12%/year

Requirements:

a Calculate total interest that Mr An can earn if he withdraws interest every month?

b Calculate total interest that Mr An can earn at the maturity date if he doesn’t withdraw interest monthly?

Question 2: Given the following set of cashflows over the lifetime of a project, what is

the present value (to the nearest $) at a discount rate of 8%?

Year Cash Flow ($)

Question 3: Suppose you face the prospect of receiving $200 per year for the next 5

years plus an extra $500 payment at the end of 5 years Determine how much this prospect is worth today if the required rate of return is 10%

Question 4: Suppose we have three future cash flows, $2,000 a year from now,

$1,000 three years from now and $1,500 five years from now The annual interest rate

is 10% What is present value of these multiple uneven future cash flows?

Question 5:

1 The present value of $100 expected in two years from today at a discount rate of

6% is:

2 If the interest rate is 12%, what is the 2-year discount factor?

3 Present value of $121,000 expected to be received one year from today at an

interest rate (discount rate) of 10% per year is:

4 The one-year discount factor at an interest rate of 100% per year is:

5 If the one-year discount factor is 0.8333, what is the discount rate (interest rate)

per year?

6 If the present value of $600 expected to be received one year from today is $400,

what is the one-year discount rate?

7 At an interest rate of 10%, which of the following cash flows should you prefer?

Project Year 1 Year 2 Year 3

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FOUNDATION OF FINANCE – 702021

8 Calculate net present value of this project with cash flow below, and make decision

whether accept or refuse this project with 8% discount rate:

9 What is the net present value of the following cash flow at a discount rate of 11%?

10 What is the net present value of the following cash flow at a discount rate of 12%?

Question 6: You agree to lease a car for 4 years at $300 per month You are not

required to pay any money up front or at the end of your agreement If your opportunity cost of capital is 0.5% per month, what is the cost of the lease?

Question 7: The state lottery advertises a jackpot prize of $295.7 million, paid in 25

installments over 25 years of $11.828 million per year, at the end of each year If interest rates are 5.9% what is the true value of the lottery prize?

Question 8: What is the future value of $20,000 paid at the end of each of the following

5 years, assuming your investment returns 8% per year?

Question 9: Mr Hopper is expected to retire in 25 years and he wishes accumulate

$750,000 in his retirement fund by that time If the interest rate is 10% per year, how much should Mr Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the payments are made at the end of each year]

Question 10: Ms Colonial has just taken out a $150,000 mortgage at an interest rate

of 6% per year If the mortgage calls for equal monthly payments for twenty years, what is the amount of each payment? (Assume monthly compounding or discounting.)

Question 11: Calculate the equivalent interest rate by 2 methods (simple interest and

compound interest) :

a) 6-month interest rate with 12% annual interest rate

b) Quarterly interest rate with 13% annual interest rate

c) Monthly interest rate with 10% annual interest rate

d) Annual interest rate with 5% 6-month interest rate;

e) Annual interest rate with 3% quarterly interest rate

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