1. Suppose the risk-free interest rate is 4%.

a. Having $200 today is equivalent to having what amount in one year?

b. Having $200 in one year is equivalent to having what amount today?

c. Which would you prefer, $200 today or $200 in one year? Does your answer depend

on when you need the money? Why or why not?

2. You run a construction firm. You have just won a contract to construct a government

office building. Constructing it will take one year and require an investment of $10 million

today and $5 million in one year. The government will pay you $20 million upon the

building's completion. Suppose the cash flows and their times of payment are certain, and

the risk-free interest rate is 10%. What is the NPV of this opportunity? Hint: Take the

present value of the benefits and subtract the present value of the costs.

3. Your computer manufacturing firm must purchase 10,000 keyboards from a supplier. One

supplier demands a payment of $100,000 today plus $10 per keyboard payable in one

year. Another supplier will charge $21 per keyboard, also payable in one year. The risk free interest rate is 6%. What is the difference in their offers in terms of dollars today?

Which offer should your firm take?

4. Your grandfather put some money in an account for you on the day you were born. You

are now 18 years old and are allowed to withdraw the money for the first time. The

account currently has $3996 in it and pays an 8% interest rate.

a. How much money would be in the account if you left the money there until your 25th birthday?

b. What if you left the money until your 65th birthday?

c. How much money did your grandfather originally put in the account?