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Time Value of Money

finance

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22 views2 pages

Time Value of Money

finance

Uploaded by

shayma.shorna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Time Value of Money

Practice Questions
1. Imprudential Inc. has an unfunded pension liability of $425 million that must be paid in
20 years. To assess the value of the firm’s stock financial analyst wants to discount this
liability back to the present. If the relevant discount rate is 5.9 percent what is the present
value of this liability?
2. An investor purchasing a British consol is entitled to receive annual payments from
the British government forever. What is the price of a consol that pays $75 annually
if the next payment occurs one year from today? The market rate is 3.1 percent.
3. What is the future value in 11 years of $1000 invested in an account with an APR of 8.9
percent:
a. Compounded annually?
b. Compounded semiannually?
c. Compounded monthly?
d. Compounded continuously?
e. Why does the future value increase as the compounding period shortens?
4. What is the present value of an annuity of $7300 per year, with the first cash flow
received 3 years from today and the last one received 30years from today? Use a discount
rate of 7 percent.
5. Suppose you are going to receive $13250 per year for five years. The appropriate rate is
7.8 percent.
a. What is the present value of the payments if they are in the form of an ordinary
annuity? What is the present value if the payments are an annuity due?
b. Suppose you plan to invest the payments for five years .What is the future value if the
payments are an annuity due?
c. Which has the higher present value, the ordinary annuity or annuity due? Which has
the higher future value? Will they always be true?
6. Young pharmaceuticals are considering a drug projects that costs $2.75 million
today and is expected to generate end-of-year annual cash flows of $273000 forever.
At what discount rate would young be indifferent between accepting or rejecting the
project?
7. Southern California publishing company is trying to decide whether to revisit its
popular textbook. The company has estimated that the revision will cost $153000.
Cash flows from increased sales will be $41000 the first year. These cash flows will
increase by 4percent per year. The book will go out of print five years from now.
Assume that the initial cost is paid now and revenue are received at the end of each
year. If the company requires 10 percent for such an investment should it undertake
the revision.

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