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Tutorial 1 Questions

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JKF
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EF216 - Tutorial 1 Questions

1. If you invest $100 at an interest rate of 15%, how much will you have at the end of
eight years?

2. In the 5 years preceding the end of 2016, the price of Amazon shares rose by 34% a
year. If you had invested $ 100 in Amazon at the beginning of this period, how much
you have by the end of the period?

3. Discount factors
a. If the present value of $139 is $125, what is the discount factor?
b. If that $139 is received in year 5, what is the interest rate?

4. Lofting Snodbury is considering investing in a new boring machine. It is expected to


produce the following cash flows:
Year 1 2 3 4 5 6 7 8 9 10
Cash flows 50 57 75 80 85 92 92 80 68 50
If the cost of capital is 12%. What is the PV of cashflows?

5. A factory costs $800,000. You reckon that it will produce an inflow after operating
costs of $170,000 a year for 10 years. If the opportunity cost of capital is 14%, what is
the present value of cashflows from the factory? What will the factory be worth at the
end of five years?

6. You have just read an advertising stating, “Pay us $100 a year for 10 years and we will
pay you $100 a year thereafter in perpetuity.” If this is a fair deal, what is the rate of
interest?

7. Siegfried Basset is 65 years of age and has a life expectancy of 12 more years. He
wishes to invest $20,000 in an annuity that will make a level payment at the end of each
year until his death. If the interest rate is 8%. What income can Mr. Basset to receive
each year?

8. The $40 million lottery prize that you have just won actually pays out $2 million a year
for 20 years. The interest rate is 8%.
a. If the first payment comes after 1 year, what is the present value of your
winnings?
b. What is the present value if the first payment comes immediately?

9. A bank loan requires you to pay $70,000 at the end of each of the next eight years. The
interest rate is 8%.
a. What is the present value of these payments?
b. Calculate for each year the loan balance that remaining outstanding, the interest
payment on the loan and the reduction in the loan balance.
10. You are quoted an interest rate of 6% on an investment of $10 million. What is the
value of your investment after four years if interest is compounded
a. Annually?
b. Monthly?
c. Continuously?

11. The continuous compounded interest rate is 12%.


a. You invest $1,000 at this rate. What is the investment worth after five years?
b. What is the PV of $5 million to be received in eight years?
c. What is the PV of a continuous streams of cash flows, amounting to $2,000 per
year, starting immediately and continuing for 15 years?

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