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1) Consider two different 10-year annuities. The first pays $1,000 per annum for the first five years and then drops to $500 for the last

1) Consider two different 10-year annuities. The first pays $1,000 per annum for the first five years and then drops to $500 for the last five years. The other pays $800 per year for ten years. If the current interest rate, r, is 10% annual compounding, which do you prefer? 2) You take out a $250,000 mortgage from a bank with a 30-year, level-pay (amortizing) loan. The initial interest rate is 7% with monthly compounding and payments are made monthly. a) What is your monthly payment? b) After 2 monthly payments, how much principal remains to be paid? 3) A project, that your company may invest in, is expected to produce an annual cashflow stream over the next 15 years. The first year the project will pay $10,000 however, due to increasing operating costs, that amount is expected to decline by 5% per annum. The initial outlay for the project is $50,000. a) Assuming a 10% cost of capital (interest) rate, what is the NPV? Would you recommend undertaking the project? b) Use a spreadsheet to find the breakeven (zero NPV) cost of capital rate? Will that rate be the total return you will achieve? 4) Suppose you borrow $150,000 for 10 years paid back in 5 equal installments starting at the end of year 6 with a 7% interest rate (annual compounding). During the first five years, the unpaid interest is added to your principal. Make a table showing, for each year, the principal outstanding at the beginning and end of year, the payment made, the interest paid, and the principal paydown. 34

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