1. Suppose you receive $100 at the end of each year for the next three years.

a. If the interest rate is 8%, what is the present value of these cash flows?

b. What is the future value in three years of the present value you computed in (a)?

c. Suppose you deposit the cash flows in a bank account that pays 8% interest per year.

What is the balance in the account at the end of each of the next three years (after

your deposit is made)? How does the final bank balance compare with your answer in

(b)?

2. Marian Plunket owns her own business and is considering an investment. If she

undertakes the investment, it will pay $4000 at the end of each of the next three years.

The opportunity requires an initial investment of $1000 plus an additional investment at

the end of the second year of $5000. What is the NPV of this opportunity if the interest

rate is 2% per year? Should Marian take it? Hint: Take the present value of the benefits

and subtract the present value of the costs.

3. Your grandmother has been putting $1000 into a savings account on every birthday since

your first (that is, when you turned 1). The account pays an interest rate of 3%. How much

money will be in the account on your 18th birthday immediately after your grandmother

makes the deposit on that birthday?

4. You are 35 years old, and decide to save $5000 each year (with the first deposit one year

from now), in an account paying 8% interest per year. You will make your last deposit 30

years from now when you retire at age 65. During retirement, you plan to withdraw funds

from the account at the end of each year (so your first withdrawal is at age 66). What

constant amount will you be able to withdraw each year if you want the funds to last until

you are 90?