Q03-11-F:

Using the knowledge you have acquired about present value, we would like you to provide a response to the following:

• Outline the concept of present value.
• The interest rate is 7%. Use the concept of present value to compare the difference between 200 to be received in ten years time and 300 to be received in 20 years time.

We would also like you to solve the following problems.

Test 1: Assume the interest rate is 6%. In each of the following three cases, state which you would rather receive and briefly explain why:

• 200 today or 480 in two years?
• 205 today or 240 in one year?
• 1,000 in one year or 1,220 in two years?

Test 2: A firm has an investment project that would cost 10 million today and yield a payoff of 15 million in four years.

• Should the firm undertake the project if the interest rate is 11%? 10%? 9%? 8%?
• Can you calculate the exact point at which the interest rate makes the difference between profitability and non-profitability?