1. Answer the following questions assuming the interest rate is 8 percent.
Time Value of Money Problems
a. What is the present value of $1,000 to be received in four years?
b. What is the present value of $1,000 in eight years? Why does the
present value fall as the number of years increases?
c. What will be the value in seven years of $12,000 invested today?
d. How much would you pay for the right to receive $5,000 at the end of year 1, $4,000 at the end of year 2, and $8,000 at the end of year 10?
e. How long will it take for a $2,000 investment to double in value?
f. What will be the value in 20 years of $500 invested at the end of
each year for the next 20 years?
g. A couple wishes to save $250,000 over the next 18 years for their child’s college education. What uniform annual amount must they deposit at the end of each year to accomplish their objective?
h. How long must a stream of $600 payments last to justify a purchase price of $7,500.00? Suppose the stream lasted only five years. How large would the salvage value (liquidating payment) need to be to justify the investment of $7,500.00?
Rate of Return Problems
i. An investment of $1,300 today returns $61,000 in 50 years. What
is the internal rate of return on this investment?
j. An investment costs $750,000 today and promises a single payment of $11.2 million in 23 years. What is the promised rate of return, IRR, on this investment?
k. What return do you earn if you pay $22,470 for a stream of $5,000 payments lasting ten years? What does it mean if you pay less than $22,470 for the stream? More than $22,470?
l. An investment promises to double your money in five years. What is the promised IRR on the investment?
m. The projected cash flows for an investment appear below. What is the investment’s IRR?