Financial Modeling
1. You are offered an asset costing $600 that has cash flows of $100 at the end of each of the next 10
years. a. If the appropriate discount rate for the asset is 8%, should you purchase it? b. What is the IRR
of the asset?
2. You just took a $10,000, 5-year mortgage loan. Payments at the end of each year are flat (equal in
every year) at an interest rate of 15%. Calculate the appropriate loan amortization table, showing the
breakdown in each year between principal and interest.
3. You are offered an investment with the following conditions: The cost of the investment is $1,000.
The investment pays out a sum X at the end of the first year; this payout grows at the rate of 10% per
year for 11 years. If your discount rate is 15%, calculate the smallest X that would entice you to purchase
the asset. For example, as you can see in the following display, X = $100 is too small—the NPV is
negative:
4. The following cash flow pattern has two IRRs. Use Excel to draw a graph of the NPV of these cash
flows as a function of the discount rate. Then use the IRR function to identify the two IRRs. Would you
invest in this project if the opportunity cost were 20%?
5. Calculate the flat annual payment required to pay off a 13%, 5-year mortgage loan of $100,000.
6. You have just taken a car loan of $15,000. The loan is for 48 months at an annual interest rate of 15%
(which the bank translates to a monthly rate of 15%/12 = 1.25%). The 48 payments (to be made at the
end of each of the next 48 months) are a l equal.
a. Calculate the monthly payment on the loan.
b. In a loan table calculate, for each month, the principal remaining on the loan at the beginning of the
month and the split of that month’s payment between interest and repayment of principal.
c. Show that the principal at the beginning of each month is the present value of the remaining loan
payments at the loan interest rate (use either NPV or the PV functions).
7. You are considering buying a car from a local auto dealer. The dealer offers you one of two payment
options: You can pay $30,000 cash. You can choose a “deferred payment plan,” paying the dealer $5,000
cash today and a payment of $1,050 at the end of each of the next 30 months. As an alternative to the
dealer financing, you have approached a local bank, which is willing to give you a car loan of $25,000 at
the rate of 1.25% per month. a. Assuming that 1.25% is the opportunity cost, calculate the present value
of a l the payments on the dealer’s deferred payment plan. b. What is the effective interest rate being
charged by the dealer? Do this calculation by preparing a spreadsheet like the one below (only part of
the spreadsheet is shown—you have to do this calculation for a l 30 months).
Now calculate the IRR of the difference column; this is the monthly effective interest rate on the
deferred payment plan.
8. You are considering a savings plan that ca ls for a deposit of $15,000 at the end of each of the next
five years. If the plan offers an interest rate of 10%, how much will you accumulate at the end of year 5?
Do this calculation by completing the spreadsheet below. This spreadsheet does the calculation twice—
once using the FV function and once using a simple table that shows the accumulation at the beginning
of each year.
You have just turned 35, and you intend to start saving for your retirement. Once you retire in 30 years
(when you turn 65), you would like to have an income of $100,000 per year for the next 20 years.
Calculate how much you would have to save between now and age 65 in order to finance your
retirement income.
Make the following assumptions:
Al savings draw compound interest of 10% per year. You make the first payment today and the last
payment on the day you turn 64 (30 payments). You make the first withdrawal when you turn 65 and
the last withdrawal when you turn 84 (20 payments).
10. You are currently 55 years old and intend to retire at age 60. To make your retirement easier,
you intend to start a retirement account:
At the beginning of each of years 1,2,3,4,5 (that is starting today and at the beginning of each of the
next four years), you intend to make a deposit into the retirement account. You think that the account
will earn 7% per year.
After retirement at age 60, you anticipate living eight more years. At the beginning of each of these years
you want to withdraw 30,000 from your retirement account. Your account balances will continue to earn
7%.
How much should you deposit annually in the account?
