6. (PV) You have just joined an investment bank. The company offers you two diff
ID: 2614450 • Letter: 6
Question
6. (PV) You have just joined an investment bank. The company offers you two different salary arrangements. You can have $50,000 per year for the next 3 years or $30,000 per year for the next 3 years, along with a $50,000 signing bonus today. If the market interest rate is 16%, which salary arrangement do you prefer?
7. (EAR and Nominal Interest Rate) An investment will increase in value by 270% over the next 17 years. What is the annual interest rate which, when compounded quarterly, provides this return?
8. (Perpetuity)A firm invests $3 million in a project which will yield a perpetuity of $1 million per year. What is the discount rate r for which this project’s present value is $4.5 million? 9. (Amortization) You just bought a car with loan of $50,000. You have to repay the loan in 6 years with monthly payments. The interest rate on the loan is 4%.
a. What is your monthly payment?
b. How much will you still owe after 4 years? (i.e. what is the loan balance after 4 years?)
Explanation / Answer
6.
Option A PV = 112,294.48
Option B PV = 117,376.69
so second option is better
7. EAR = ((1+2.70)1/4 - 1 ) * 4 = 154.77%
8. present value of perpetutiy = 3 + 4.5 = 7.5 million
rate = 1/7.5 = 13.33%
9. PV = 50,000, FV = 0, rate = 4%/12, N = 72
use PMT function in Excel
a) monthly payment = 782.26
put N = 48 and calculate FV
b) amount owed after 4 years = 18,014.06
Discount rate 16.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow - 0 - - 50,000.000 1 43,103.45 43,103.45 50,000.000 2 37,158.15 80,261.59 50,000.000 3 32,032.88 112,294.48Related Questions
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