Question 11

Prudential Mutual has an unfunded pension liability of $450 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to take into account this liability by discounting it back to the present. If the relevant discount rate is 5.2% p.a., what is the present value of the liability?

Question 12

Jane has a coin collection containing fifty 1952 silver dollars. She purchased them for their face value in 1952 when they were new. How much will her collection be worth in 2067, assuming they appreciate at an annual rate of 4.3%?

Question 13

Assume the total cost of a college education will be $325,000 when your child enters college in 18 years. You currently have $85,000 to invest. What annual rate of return must you earn on your investment to cover the cost of your child's college education?

Question 14

Chris has no money of his own but has come up with a project that requires investment cost of $3,000 today and will pay off $5,500 in one year. Capital markets function perfectly. Therefore, Chris can borrow and lend at 10% per year as much as he wants.

Find out the maximum amount of consumption Chris can enjoy in one year from today.

Question 15

According to the Census Bureau, the average house price in the U.S. was $368,600 in October 2069. In October 2050, the average price was $197,700. What was the annual increase in the price of the average house sold?

Question 16

It is December 31, 2050, today. You expect two payments to receive, $20,000 at the end of 2052 and $30,000 at the end of 2054. Upon receiving each payment, you will invest them at 5% per year until the end of 2057. How much will be the value of your investment at the end of 2057?

Question 17

Suppose that you have $1,000 in hand and can borrow and lend at 10% per year without restriction. Additionally, you have come across an investment opportunity, which costs you $7,000 today and will return $11,000 in one year. Find out the total value of your wealth in one year from today.

Question 20

Consider a project that requires an investment cost of $10 million today. The project is expected to generate a cash flow $12 million in one year. Assume that a discount rate of 10% applies to all cash flows concerned with the firm.

a) Suppose the firm has $10 million in hand. How much is the project worth, net of the cost, in terms of the present value today? Provide the answer in $ million, rounded to 4 decimal places.

b) Suppose the firm has no cash in hand. The firm instead can issue a financial claim priced $10 million today that promises to pay investors $11 million in one year. How much is the project worth, net of the cost, in terms of the present value today (in $ million, in 4 decimal places)?