1

Assume that you have $1000 to invest in three years. Consider the following options:

Bank 1 pays 5% annual interest rate in three years;

Bank 2 pays 8% interest rate in the first year, 5% annual interest rate in the 2nd year and 3% interest rate in the 3rd year

Bank 3 pays 3% annual interest rate in the first 2 years, and 7% annual interest rate in year 3.

2

Calculate the investment value after 3 years, assuming annually compounded interest rate. Which option gives you the highest value? A project generates the following cash flow stream: $432 in year 1, $137 in year 2, $797 in year 3. If the opportunity cost of capital is 15%, what is the present value of the project?

3

A lottery has a $10 million prize. The prize will be paid in 5 years. The winner will receive $2 mil. each year. If the first payment is made immediately after winning the lottery, what is the present value of that lottery? Assume 6% interest rate.