Suppose that you will receive $10,000 five years from now. What is it worth toda
ID: 2724317 • Letter: S
Question
Suppose that you will receive $10,000 five years from now. What is it worth today? What is it worth 3 years from today? What is it worth 10 years from today? What constant payment for the next 20 years is equivalent to receiving $10,000 five years from now? Assume the cost of capital is 10%.
Suppose you plan to purchase a car. You tell the car salesperson you can pay $200 per month.
The salesperson offers you the following options.
A car that is worth $7,000 dollars for $200 a month for 4 years at 3% APR.
A car that is worth $13,000 dollars for $200 a month for 5 years at 4% APR.
A car that is worth $15,000 dollars for $200 a month for 7 years at 5% APR.
Which of these options is the best deal?
Suppose that 2 years from now you will deposit $100 into an account paying 10% APR. In years 4, 6, … 50 (every even year) you will deposit 105, 110.25, … 322.51 respectively (5% growth in the deposit). In odd years (starting year 3) 3, 5, … 49 you will withdraw $100 (no growth). How much will be in your account at the end of year 50?
Suppose you are evaluating the following investment opportunity. The firm is expected to have cash flows of $100 starting one year from now and they are expected to grow by 10% each of the next 4 years. Every year following year five the cash flows will grow by 7%. Assuming the cost of capital is 8%, what is the value of this firm today?
Explanation / Answer
Ans:
Present value = C1/ (1+r) n
= $10,000 / (1+0.10) 5
= $6,209.21
Calculation of future value for 3, 10, 20, years:
Future value = Present value * (1+r) n
= $10,000 * (1+0.10) 3
= $13.310
Calculation for 10 years:
= $25,937.42
Calculation for 20 years:
= $67,275
According to the payments, the best deal is that $13,000 for $200 per month with in 4 years with best Apr rate.
= monthly paid * no of years
= 200 * 5
= $12,000.
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