Exercise 3-1 Basics ofthe discounting methods ofinvestment appraisal

a) At the beginning of year 1 you can invest € 5,000. If the interest rate is 8 % per annum, how much will you get at the end of year 6?

b) Suppose in three years you would need the sum of € 250,000 to buy land. The bank lends the money at an interest rate of 7 %. How much do you have to invest today?

c) What is the better alternative if the interest rate is 5 %: Getting € 2,000 at the beginning of year 1 or getting € 3,000 at the end of year 4?

d) You could receive € 1,000, then € 2,000 and finally € 3,000 at the end of each of the following 3 years as preliminary payments on your inheritance from your grandfather. You as well as your grandfather could reinvest these payments on the capital market at 8 %.

What amount would your grandfather offer alternatively now?

e) What constant amount of money could you withdraw from your bank account over three years at the end of each year if an initial capital of € 20,000 had been invested at 6 %?