What is the present value and why does future value increase

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Reference no: EM13647000

Q1. Present Value and Multiple Cash Flows

Conoly Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent?

Q2. Calculate EAR

Find the EAR in each of the following cases:

Stated Rate, APR (%)

Number of Times Compounded (m)

Effective Rate, EAR

(%)

7

Quarterly (m = 4)

7.19

16

Monthly   (m = 12)

17.23

11

Daily         (m = 365)

11.63

12

Infinite     (m = ∞)

12.75

Q3. Calculating Number of Periods

One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $700 per month. You will charge 1.3 percent per month interest on the overdue balance. If the current balance is $21,500, how long will it take for the account to be paid off?

Q4. Future Value

What is the future value in six years of $1,000 invested in an account with a stated annual interest rate of 9 percent?

Why does the future value increase as the compounding period shortens?

Q5. Calculating Annuities

You are planning to save for retirement over the next 30 years. To do this, you will invest $800 a month in a stock account and $350 a month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with an 8 percent return. How much can you withdraw each month from your account assuming a 25-year withdrawal period?

Q6. Present Value and Interest Rates

What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $6,800 per year at the current interest rate of 10 percent per year. What happens to value of your investment if interest rates suddenly drop to 5 percent? What if interest rates suddenly rise to 15 percent?

Q7. NPV versus IRR

Consider the following cash flows on two mutually exclusive projects for the Phuket Recreation Corporation (PRC). Both projects require an annual return of 14 percent.

Reference no: EM13647000

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