Master - Chapter 2: Skill building exercises

PV and FV

Skill-Building Problems.

1. A single cash flow of $1,673.48 will be received in 4 periods. For this cash flow, the appropriate

discount rate / period is 7.8%. What is the present value of this single cash flow?

2. A single cash flow of $932.47 is available now (in period 0). For this cash flow, the appropriate

discount rate / period is 3.9%. What is the period 4 future value of this single cash flow?

Annuity

Skill-Building Problems.

1. An annuity pays $142.38 each period for 6 periods. For these cash flows, the appropriate discount

rate / period is 4.5%. What is the present value of this annuity?

2. An annuity pays $63.92 each period for 4 periods. For these cash flows, the appropriate discount

rate / period is 9.1%. What is the period 5 future value of this annuity?

Net Present Value

Skill-Building Problems.

1. A project requires a current investment of $189.32 and yields future expected cash flows of

$45.19, $73.11, $98,54, $72.83, and $58.21 in periods 1 through 5, respectively. All figures are in

thousands of dollars. For these expected cash flows, the appropriate discount rate is 6.3%. What

is the net present value of this project?

2. A project requires a current investment of $54.39 and yields future expected cash flows of

$19.27, $27.33, $34.94, $41.76, and $32.49 in periods 1 through 5, respectively. All figures are in

thousands of dollars. For these expected cash flows, the appropriate discount rate starts at 6.4% in

period 1 and declines to 5.4% in period 5. What is the net present value of this project?

Skill-Building Problems.

1. A project requires a current investment of $117.39 and yields future expected cash flows of

$38.31, $48.53, $72.80, $96.31, and $52.18 in periods 1 through 5, respectively. All figures are in

thousands of dollars. The inflation rate is 2.7%. For these expected cash flows, the appropriate

Real Discount Rate is 8.6%. What is the net present value of this project?

2. A project requires a current investment of $328.47 and yields future expected cash flows of

$87.39, $134.97, $153.28, $174.99, and $86.41 in periods 1 through 5, respectively. All figures

are in thousands of dollars. The forecasted inflation rate starts at 3.4% in period 1 and increases to

4.7% in period 5. For these expected cash flows, the appropriate REAL discount rate starts at

7.8% in period 1 and decreases to 5.4% in period 5. What is the net present value of this project?

PMT and sensitivity EX

Skill-Building Problems.

1. To purchase a house, you take out a 30 year mortgage. The present value (loan amount) of the

mortgage is $217,832. The mortgage charges an interest rate / year of 9.27%. What is the annual

payment required by this mortgage? How much of each year's payment goes to paying interest

and how much reducing the principal balance?

2. In purchasing a house, you need to obtain a mortgage with a present value (loan amount) of

$175,000. You have a choice of: (A) a 30 year mortgage at an interest rate / year of 9.74% or (B)

a 15 year mortgage at an interest rate / year of 9.46%. What is the annual payment required by the

two alternative mortgages? How much of each year's payment goes to paying interest and how

much reducing the principal balance by the two alternative mortgages? Which mortgage would

you prefer?

3. Consider a 30 year mortgage for $442,264 as in the previous section. What would happen if the

interest rate / year dropped from 9.21% to 7.95%. How much of each year's payment goes to

paying interest vs. how much goes to reducing the principal under the two interest rates?

Evaluation Project

1.      Consider about investment project evaluation for the initial investment of $100.000 and the cash flow of $25.000 in each year in 5 years. The discount rate is 9%, and the require period of payback is 4 years. Use NPV, IRR, PBP and PI.

2.      Note the following information on the annual cash flows of two mutually exclusive projects under consideration by Wang Food Markets, Inc.
Year A B
0 $230,000 $260,000
1 10,000 20,000
2 10,000 20,000
3 10,000 20,000
4 10,000 20,000
5 10,000 20,000
Wang requires a 14 percent rate of return on projects of this nature.
a. Compute the NPV of both projects.
b. Compute the internal rate of return on both projects.
c. Compute the profitability index of both projects.
d. Compute the payback period on both projects.
e. Which of the two projects, if either, should Wang accept? Why?