Time Value of Money

Pages: 6 (2416 words) Published: November 22, 2011
Time Value of Money Practice Problems − Solutions

4) Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors \$750 at the end of each month for the next eight years. You believe that a reasonable return on your investment should be 17 percent compounded monthly. a) How much should you pay for the investment? P/Y = 12, N = 8 × 12 = 96, I = 17, PMT = 750, FV = 0 ⇒ − \$39,222.96. b) What will be the total sum of cash you will receive over the next eight years? This can be solved by setting I = 0, PV = 0, and computing FV = − \$72,000. Notice that the sign of this solution is negative because the payments have been entered as positive values. c) Why is there such a large difference between (a) and (b)? The difference between the answers in parts (a) and (b) represents the foregone interest that results from receiving the payments in the future, rather than today. 5) Walt is evaluating an investment that will provide the following returns at the end of each of the following years: year 1, \$12,500; year 2, \$10,000; year 3, \$7,500; year 4, \$5,000; year 5, \$2,500; year 6, \$0; and year 7, \$12,500. Walt believes that he should earn an annual rate of 9 percent on this investment. How much should he pay for this investment? This can be solved using the irregular cash flow worksheet: CF0 = 0 C01 = 12,500 C02 = 10,000 C03 = 7,500 C04 = 5,000 C05 = 2,500 C06 = 0 C07 = 12,500 Set I = 9 and solve for NPV = \$37,681. 6) A loan of \$50,000 is due 10 years from today. The borrower...