Hong Kong Community College CCN2113 Financial Management Tutorial Questions Chapter 5 Discounted Cash Flow Valuation 54 An investment offers $6,700 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever? 5.20 You want to buy a new sports coupe for $68,500, and the finance office at the dealership has quoted you a loan with an APR of 5.9 for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan? 5.30 You want to buy a new sports car from Muscle Motors for S52,500. The contract is in the form of a 60-month annuity due at a 6.25 percent APR. What will your monthly payment be? Additional take-home exercises 5.1 Rooster Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent? Year Cash Flow $ 830 1 GN- 610 1,140 1,390 5.16 What is the future value of $1,270 in 16 years assuming an interest rate of 9 percent compounded semiannually? 5.24 You are to make monthly deposits of $500 into a retirement account that pays 10.3 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years? 5.25 In the previous problem, suppose you make $6,000 annual deposits into the same retirement account. How large will your account balance be in 35 years? 1 5.35 You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements. You can have $6,100 per month for the next two years, or you can have $4,800 per month for the next two years, along with a $25,000 signing bonus today. If the interest rate is 7 percent compounded monthly, which do you prefer? 5.43 You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30- year mortgage loan for 80 percent of the $2,900,000 purchase price. The monthly payment on this loan will be $14,900. What is the APR on this loan? The EAR? 5.45 You have arranged for a loan on your new car that will require the first payment today. The loan is for $32,000, and the monthly payments are $620. If the loan will be paid off over the next 60 months, what is the APR of the loan? 5.46 Suppose you are going to receive $15,000 per year for five years. The appropriate interest rate is 8 percent. a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an annuity due? b. Suppose you plan to invest the payments for five years. What is the future value if the payments are an ordinary annuity? What if the payments are an annuity due? c. Which has the higher present value, the ordinary annuity or annuity due? Which has the higher future value? Will this always be true? 5.50 A 10-year annuity pays $1,900 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded monthly thereafter, what is the present value of the annuity? 5.51 You have your choice of two investment accounts. Investment A is a 10-year annuity that features end-of-month $1,525 payments and has an interest rate of 7 percent compounded monthly. Investment B is an annually compounded lump-sum investment with an interest rate of 9 percent, also good for 10 years. How much money would you need to invest in B today for it to be worth as much as Investment A 10 years from now? 5.52 Given an interest rate of 5.75 percent per year, what is the value at Year 7 of a perpetual stream of $5,000 payments that begin at Year 20
