Professional Documents
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PracticeProblems
FVofalumpsum
i.
Acompanys2005saleswere$100million.Ifsalesgrowat8%peryear,howlarge
willtheybe10yearslater,in2015,inmillions?
PVofalumpsum
ii.
SupposeaU.S.governmentbondwillpay$1,000threeyearsfromnow.Ifthegoing
interestrateon3yeargovernmentbondsis4%,howmuchisthebondworthtoday?
Interestrateonasimplelumpsuminvestment
iii.
TheU.S.Treasuryofferstosellyouabondfor$613.81.Nopaymentswillbemade
untilthebondmatures10yearsfromnow,atwhichtimeitwillberedeemedfor
$1,000. What interest rate would you earn if you bought this bond at the offer
price?
Numberofperiods
iv.
AddicoCorp's2005earningspersharewere$2,anditsgrowthrateduringtheprior
5yearswas11.0%peryear.Ifthatgrowthrateweremaintained,howlongwouldit
takeforAddicosEPStodouble?
PVofanordinaryannuity
v.
Youhaveachancetobuyanannuitythatpays$1,000attheendofeachyearfor5
years. You could earn 6% on your money in other investments with equal risk.
Whatisthemostyoushouldpayfortheannuity?
Paymentsonanannualannuity
vi.
Supposeyouinherited$200,000andinvesteditat6%peryear.Howmuchcould
youwithdrawattheendofeachofthenext15years?
Paymentsonamonthlyannuity
vii.
You are buying your first house for $220,000, and are paying $30,000 as a down
payment.Youhavearrangedtofinancetheremaining$190,00030yearmortgage
with a 7% nominal interest rate and monthly payments. What are the equal
monthlypaymentsyoumustmake?
PVofaperpetuity
viii.
Whatsthepresentvalueofaperpetuitythatpays$100peryeariftheappropriate
interestrateis6%?
Rateofreturnonaperpetuity
ix.
Whatstherateofreturnyouwouldearnifyoupaid$1,500foraperpetuitythat
pays$105peryear?
PVofanunevencashflowstream
x.
Atarateof8%,whatisthepresentvalueofthefollowingcashflowstream?$0at
Time0;$100attheendofYear1;$300attheendofYear2;$0attheendofYear3;
and$500attheendofYear4?
i.
FV of a lump sum
N
I/YR
PV
PMT
FV
ii.
iii.
iv.
v.
vi.
EASY
Answer: a
EASY
Answer: c
EASY
Answer: c
EASY
5
6.00%
$4,212.36
-$1,000
$0.00
Answer: e
6.64
11.00%
-$2.00
$0
$4.00
PV of an ordinary annuity
N
I/YR
PV
PMT
FV
EASY
10
5.00%
-$613.81
$0
$1,000.00
Number of periods
N
I/YR
PV
PMT
FV
Answer: c
3
4%
$889.00
$0
-$1,000.00
EASY
10
8%
-$100.00
$0.00
$215.89
PV of a lump sum
N
I/YR
PV
PMT
FV
Answer: e
15
6.00%
-$200,000
$20,592.55
$0.00
vii.
Mortgage payments
N
I
PV
PMT
FV
Answer: c
360
0.5833%
$190,000
-$1,264
$0.00
viii. PV of a perpetuity
I/YR
PMT
PV
ix.
x.
CFs:
PV of CFs:
PV =
PV =
EASY
Answer: b
EASY
Answer: a
EASY
$1,500
$105
7.00% Divide PMT by Cost.
Answer: e
6.00%
$100
$1,666.67 Divide PMT by I.
MEDIUM
8%
0
$0
$0
$717.31
$717.31
1
2
3
4
$100
$300
$0
$500
$92.59
$257.20
$0
$367.51
Find the individual PVs and sum them.
Automate the process using Excel or a calculator, by inputting
the data into the cash flow register and pressing the NPV key.