Question
Most of these problems will be easier using a spreadsheet. 1. What is the present value...
Most of these problems will be easier using a spreadsheet.
1. What is the present value of a perpetuity with $5000 annual payments? Assume 3% discount rate.
2. How much money do you need to create an annuity of $2000/month for 20 years assuming you can invest the capital in an instrument (say treasuries) with a 3% rate and semi-annual compounding?
3. You wish to purchase a new car which costs $50,000. You have $10,000 for a down payment. The bank will charge you 8% (annual) and give you a 5-year loan (60 months). What is your monthly payment? Assume the interest is added at the end of each month.
4. Calculate the Payback, NPV, & IRR for the two projects.
a. For the Payback, assume first no discount rate and then discount the cash flows by 5%. How does the Discounted Payback period change?
b. For NPV, which project is best if the rate used is 10%? 15%?
c. What are the IRRs for each project?
|
year |
Project1 |
Project 2 |
|
0 |
-15000 |
-18000 |
|
1 |
9500 |
10500 |
|
2 |
6000 |
7000 |
|
3 |
2400 |
6000 |
Homework Answers
Answer #1
1
PV = annual payment/discount rate = 5000/0.03=166666.67
2
| EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100 |
| Effective Annual Rate = ((1+3/2*100)^2-1)*100 |
| Effective Annual Rate% = 3.02 |
| PVOrdinary Annuity = C*[(1-(1+i/100)^(-n))/(i/100)] |
| C = Cash flow per period |
| i = interest rate |
| n = number of payments |
| PV= 2000*((1-(1+ 3.0225/1200)^(-20*12))/(3.0225/1200)) |
| PV = 359890.48 |
Please ask remaining parts separately, questions are unrelated.
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