# Exercises - TVM and Security Valuation

.docx
School
Royal Melbourne Institute of Technology **We aren't endorsed by this school
Course
BUSM 4129
Subject
Finance
Date
Oct 17, 2023
Pages
4
Uploaded by ChiefBoulder11774 on coursehero.com
Time Value of Money / Discounted Cash Flow Basic Practice Questions Practice Exercises 1. You have \$15,000 to invest for 4 years at 8% per annum. What is future value? 2. You need \$30,000 in 3 years time. The interest rate is 7% per annum. How much do you need to invest now? 3. You invested \$8,967 at 6% per annum and now you have \$12,000. For how long has your money been invested? 4. You invested \$8,000 for 4 years and now have \$9,910.60. What interest rate are you receiving. Questions 1 to 4 are of the type where there is just one initial amount. There are four variables - PV, FV, interest rate and number of periods. If you know any three, you can find the fourth. 5. You will be receiving \$1,000 in one year's time, \$500 in two year's time and \$800 in three years time. What is the present value of this set of cash flows if the appropriate discount rate is 5%? 6. The stated annual rate of interest (Annual percentage rate - APR) for an investment is 5%. The compounding period is monthly. What is the effective annual rate (EAR)? 7. You wish to provide a prize of \$500 every year forever and ever. The first prize will be awarded in exactly one year's time. How much do you need to provide now to fund this prize? The appropriate discount rate is 4% per annum. 8. You wish to provide a prize every year for ever and ever. The first prize of \$500 will be awarded in exactly one year's time. To provide for inflation you specify that the value of the prize is to grow by 3% every year i.e. the second prize will be \$515. How much do you need to provide now to fund this prize? The appropriate discount rate is 4% per annum. 9. You wish to receive \$10,000 every year for 5 years. The first payment will be in exactly 1 year's time. The appropriate discount rate is 4%. How much do you need to invest now to receive these cash flows? 10. You take out a mortgage of \$200,000 at 8% per annum. You will be making 20 annual equal payments with the first payment in exactly 1 year's time. How much is each payment? 11. What is the present value of an annuity that pays \$6,000 every year for 10 years, with the first payment in one year's time? The discount rate is 8%. 12. What is the present value of an annuity that pays \$6,000 every year for 10 years, with the first payment today? The discount rate is 8%. 1
13. What is the present value of an annuity that pays \$6,000 every year for 10 years, with the first payment two years from today? The discount rate is 8%. 14. What is the value of a perpetuity of \$70,000 if the discount rate is 11% and the first payment is in one year's time? 15. What is the value of a perpetuity of \$70,000 if the discount rate is 11% and the first payment is today? 16. You are taking out a personal loan for \$50,000 at an interest rate of 8% p.a. compounding yearly. You will be making 10 equal yearly payments, with the 1st payment in one year's time. What is the yearly payment? 17. You are taking out a personal loan for \$50,000 at an interest rate of 8% p.a. compounding six monthly. You will be making 20 equal payments, with the 1st payment in 6 month's time. What is the six monthly payment? 18. What is the value of a growing perpetuity where the first payment is \$500, the growth rate is 2.5% and the discount rate is 4.25%? 19. What is the value of a growing perpetuity where the first payment is \$500, the growth rate is 2.5% and the discount rate is 4.25%? 20. You are quoted an interest rate of 16% compounding quarterly. What is the effective interest rate? 21. A project has the following cash flows: Y0 -\$5,000 Y1 -\$1,000 Y2 +\$3,000 Y3 +\$4,500 If the discount rate is 5%, what is the NPV? 2