Finance: Net Present Value and Rate

Suppose you know that your will need $2500 tow years from now in order to make a down payment on a car. A. Bank One is offering 4% interest (compounded annually) for two-year accounts and Bank Two is offering 4. 5% (compounded annually) for two-year accounts. If you know you need $2500 two years from today, how much will you need to invest in Bank One to reach your goal? Alternatively, how much will you need to invest in Bank Two? Which bank account do you prefer? B. Now suppose you do not need the money for three years. How such will you need to deposit today in Bank One? Bank Two? 19.

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Lucky Lynn has a choice between receiving $1000 from her great uncle one year from today or $900 from her great aunt today. She believes she could invest the $900 at a one-year return of 12%. A. What is the future value of the gift from her great uncle upon receipt? From her great aunt? B. Which gift should she choose? C. How does your answer change if you believed she could invest the $900 from her great aunt at only 10%? At what rate is she indifferent? 20. As manager of short- term projects, you are trying to decide whether or not to invest in a short-term reject that pays one cash flow of $1000 one year from today.

The total cost of the project is $950. Your alternative investment is to deposit the money in a one-year bank certificate of deposit, which will pay 4% compounded annually. A. Assuming the cash flow of $1000 is guaranteed (there is no risk you will not receive it), what would be a logical discount rate to use to determine the present value of the cash flows of the project? B. What is the present value of the project if you discount the you invest in the project? C. What would you do if the bank increases its quoted rate on one-year CDC to 5. 5%? D.

At what bank one-year CD rate would you be indifferent between the tow investments? 21 . Calculate the net present value of the following cash flows: You invest t$2000 today and receive $200 one year from now, $800 two years from now, and $1000 a year from 10 years starting four years from now. Assume that the interest rate is 8%. 22. Your cousin has asked for your advice on whether or not to buy a bond for $995, which will make one payment of $1200 five years from now, or invest in a local bank account. A. What is the internal rate of return on the bond’s cash flows? What additional information do you need to make a hospice? . What advice would you give her if you learned the bank paying 3. 5% per year for five years (compounded annually)? C. How would you advice change if the bank were paying 5% annually for five years? If the price of the bond were $900 and the bank pays 5% annually? 23. You and your sister have Just inherited $300 and a savings bond from you great grandfather who had left them in a safe deposit box. Because you are the oldest, you get to choose whether you want the cash or the bond. The bond has only four years left to maturity at which time it will pay the holder $500 a.

If you took the $300 today and invested it at an interest rate 6% per year, how long (in years) would it take for your $300 to grow to $500? (Hint: You want to solve for n or number of periods. ) Given these circumstances, which are you going to choose? B. Would you answer change if you could invest the $300 at 10% per year? At 15% per year? What other decision rules could you use to analyze this decision? 24. Suppose you have three personal loans outstanding to your friend Elizabeth. A payment of $1000 is due today, a $500 payment is due one year from now, and a $250 payment is due two years from now.