ACTIVITIES

1. Michael has been injured at work. The court decided today that his injuries were due to company negligence and ordered the company to compensate Michael as follows:

a) An amount of 10000 for medical expenses and 1000 for court expenses for this year.

b) Compensation relating to incapacity for work for the next 4 years. The amounts are 12000 at the end of year 1, 13000 at the end of year 2, 14000 at the end of year 3, and 15000 at the end of year 4.

The court decided that the company should pay the whole amount of compensation by the end of next year.

Requirement

Find how much is the total payment to Michael considering an interest rate of 6%.

2. Nicolas plans to deposit at the end of each trimester, at a bank 250 for 5 years. The annual rate of interest is 4% and the interest is compounded to his account every quarter.

Requirement

Find the total amount of money accumulated at the end of the 5^th year.

3. You are a consultant for the company AAA. This company is planning to invest at the end of each month fixed amount so that in 10 years' time can pay a lump sum of 150000 for the retirement of its executive director. The interest rate of the investment is 6%.

Requirement

Find the monthly amount to be deposited each month.

4. Spyros pays 650 rent at the beginning of each month for his apartment. His rental agreement is for 4 years.

Requirement

Find the present and future value of all the rental payments when the annual interest rate is 4% compounded monthly.

5. You are working as an analyst for an investment company called ABC. The company owns a piece of land and is considering how to use it. You are asked to evaluate two alternatives and select the most beneficial. The annual interest rate in the market is currently 9%.

a. There is an agreement with a third party, to convert the land into a car park. The estimated net income for ABC from this investment is 5.000 at the end of each month (interest is compounded monthly). In 10 years time according to the agreement, the land will be sold to the third party for 110.000.

b. A developer made an offer to purchase the land now for 500000.

Requirement

Which option do you think is more beneficial for your company?

Hint

To find the most profitable option, you must compare the cash flows of the two investments at the same point in time.

6. Suppose that perpetuity pays $100 per year and assume that the appropriate rate of interest is 5% per year.

Requirement

Find the present value of the perpetuity.

7. In 5 years from now (end of 5^th year) your brother will begin his university education at Neapolis. He is required to pay the fees of 10.000 at the beginning of each year of the 4 years of his studies. The annual interest rate in the market is 10%.

Requirement

What is the cost of his studies in todays value?

Find the future value of the cost of his studies at the year of his graduation.

8. Today you are considering an investment that will pay 12.500 at the end of each year for 5 years beginning in two years time. If you require a 9% return on your investment, how much are you willing to pay for this investment today?

9. In 2 years from now you are planning to invest in a share that gives a dividend of 50 at the end of each year for ever. Assume a required return on the investment of 10%.

Requirement

Find the present value of all the future dividends.