Exam 4: Discounted Cash Flow Valuation

Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is $136 million. The owner of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire expansion project. Management has decided to save $450,000 a month for this purpose. The firm earns 6% compounded monthly on the funds it saves. How long does the company have to wait before expanding its operations?

What is the effective annual rate of 14.9% compounded continuously?

George Jefferson established a trust fund that provides $150,000 in scholarships each year for worthy students. The trust fund earns a 4.25% rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25 million be paid to the president upon the completion of her first ten years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6.5% on these funds. How much must the company set aside each year for this purpose?

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45% compounded daily. Loan B offers a rate of 7.5% compounded semi-annually. Loan _____ is the better offer because ______.

An annuity:

An annuity stream of cash flow payments is a set of:

The government has imposed a fine on the Not-So-Legal Company. The fine calls for annual payments of $100,000,$250,000,and $250,000,respectively over the next three years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount,including investment earnings,to a national health center. The government will earn 3.5% on the funds held. How much will the national health center receive three years from today?

The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account?

The time value of money concept can be defined as:

The Bad Guys Co. is notoriously known as a slow-payer. It currently needs to borrow $25,000 and only one company will even deal with Bad Guys. The terms of the loan call for daily payments of $30.76. The first payment is due today. The interest rate is 21% compounded daily. What is the time period of this loan?

Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today,$15,000 one year from today,and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today's dollars if the discount rate is 6%?

The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate,what are these payments worth to you when you first start college?

What is the present value of 10 annual payments of $500 at a discount rate of 12%?

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity,your agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the rate of return on this investment?

If the stated rate of interest is 12% and it is compounded monthly,what is the effective annual interest rate?

What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25%? The cash flows occur at the end of each year.