# Write the future value equation b.Write down the present value equation… 1 answer below »

Exercise-1

Question 1

a.Write the future value equation

b.Write down the present value equation

c.Write down the continuous compounding equation

Question 2

Rakesh deposits \$1,000 with Barclays Bank. If interest rates in the market are at 10%:

a.How much will Rakesh have in total after 1-year using simple interest?

b.How much will Rakesh have in total after 1-year using compounding?

c.Mehta has deposited \$1,000 into an account that pays 10% compounded continuously in1-year

Question 3: Future Value

Rakesh deposits \$10,000 with Barclays Bank. If interest rates in the market are at 10%:

a.How much will Rakesh have in total after 5-years using simple interest?

b.How much will Rakesh have in total after 5-years using compounding?

c.How much will Rakesh have in total after 5-years using continuous compounding?

Question 4

Rakesh wants to buy a house worth \$100,000 after 5-years. If interest rates in the market are at 10%:

a.How much should Rakesh deposit with the HSBC if he is to achieve his goal?

Question 5

Rakesh is given the following stream of future cash flows:

 Year Expected Future Cash Flow 1 \$15,000 2 \$50,000 3 \$20,000 4 \$25,000 5 \$100,000

a.Determine the present value of the above cash flow stream given that interest rates are at10%

Question 6

Complete the loan amortization schedule below for a \$100,000 loan with 10% interest per annum over a 5-year repayment period

Exercise 2

Question 1

You are given the following data about two investment projects:

 Year Project Y Project Z 0 -\$150,000 -\$100,000 1 \$50,000 \$35,000 2 \$75,000 \$60,000 3 \$100,000 \$80,000

Given that the discount rate is 10% and the desired payback is 2 years:

Required:

1. Calculate the payback period of each project

2. Which project will you accept if they are independent and why?

3. Calculate the NPV of each project.

4. Which project will you accept if they are mutually exclusive and why?

5. Which method (payback or NPV) is better at project valuation and why?

Question 2

With a total budget of \$500,000 and given the following data, which project or project combination would you prefer using the Profitability Index Approach?

 Project A Project B Project C Project D Initial Outlay \$250,000 \$125,000 \$150,000 \$300,000 NPV \$100,000 \$85,000 \$90,000 \$225,000

Exercise 3

Practice Question 1

1. What is the value of a 5-year 7% annual coupon bond when the discount rate is

a. 6%

b. 7%

c. 8%

d. Show that the results obtained above are consistent with the relationship between the coupon rate, discount rate, and price relative to par given in the text?

Practice Question 2

2. Calculate the price of a:

a. 4-year 10% annual coupon bond with an 8% discount rate

b. 4-year 10% semi-annual coupon bond with an 8% discount rate

Practice Question 3

3. What is the value of a:

a. 5-year zero coupon bond with a par value of \$1000 and an 8% discount rate?

b. Perpetuity which pays \$1500 annually when the yield to maturity is 10%

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