Financial Management - Chapter 4, problems 4-1, 4-2, and 4-7
4.1 –If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account in 5 years?
N = 5
I = 10%
PV = $10,000
FV = $16,105.10
4.2 – What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?
N = 20
I = 7%
FV = $5,000
PV = $1,292.10
4.7 – An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? It’s future value?
Yr1-3 = $100
Yr4 = $200
Yr5 = $300
Yr6 = $500
I = 8%
NPV = $923.98
FPV = $1,466.23
6.3 –
1. 5% + 7% = 12%
2. 5%*1= 5, 5 + 12 = 16.9%
What is an "opportunity cost rate" and how is this rate used in discounted cash flow analysis?
What is an opportunity cost rate?
“The opportunity cost rate is the rate of return available on the best alternative investment of similar risk” (Brigham & Ehrhardt, 2014).
How is this rate used in discounted cash flow analysis?
The opportunity cost rate is the value of "i" in the time value of money equation
References
Brigham, E. & Ehrhardt, M. (2014). Financial management: Theory and practice (14th ed.). Mason, OH: South-Western, Cengage
