Question 1

Roy Gross is considering an investment that pays 5 percent. How much will he have to invest

0
6 years

PV = ? FV = $23,000
Value of investment after 6 years = FV6 = 23,000
Return expected from investment = i = 5%
Duration of investment = n = 6
Amount to be invested today = PV

PV = $17,162.95

Question 2

You brother has asked you for a loan and has promised to pay back $7,200 at the end of three
years. If you normally earn 8 percent on your investments, what is the present value of the loan
amount?

0
3 years

PV = ? FV = $7,200
Value of investment after 2 years = FV2 = 7,200
Return expected from investment = i = 8%
Duration of investment = n = 3
Amount to be invested today = PV

PV = $5,715.59

Question 3

Infosys Technologies Ltd, an Indian technology company, reported a profit of $422,000,000 this
year. Analysts expect the companys earnings to be $1,650,000,000 in five years. What is the
companys earnings expected growth rate?

Earnings in current year = PV = $422,000,000

Expected earnings five years from now = $1,650,000,000
To calculate the expected sales growth rate, we set up the future value equation.
g = 31.35%

Question 4

Neon Lights Ltd is a private company with sales of $1,350,000 a year. They want to go public, but
have to wait until the sales reach $2,000,000. Providing that they are expected to grow at a
steady 12.0 percent annually, when is the earliest Neon Lights can start selling their shares?
Current level of sales = PV = 1,350,000
Target sales level in the future = FV = 2,000,000
Projected growth rate = g = 12.0%
To calculate the time needed to reach the target FV, we set up the future value equation.

n = 3.47 years
Question 5
Which one of the following statements is NOT true?

Present value calculations involve bringing a future amount back to the present.

The future value is often called the discounted value of future cash payments.

The present value factor is more commonly called the discount factor.

The higher the discount rate, the lower the present value of a dollar.

Question 6

Future value with multiple cash flows: Ben Woolmer has an investment that will pay him the
following cash flows over the next five years: $6,749, $4,331, $4,297, $9,667, and $5,727. If
his investments typically earn 12.14 percent, the future value of this set of cash flows at the end
of five years is $

FV5 = $6,749(1.1214)4 + $4,331(1.1214)3 + $4,297(1.1214)2 + $9,667(1.1214)1 + $5,727

= $10,672.88 + $6,107.59 + $5,403.64 + $10,840.57 + $5,727

= $38,751.68

Question 7

Present value with multiple cash flows: Biogenesis Ltd expects the following cash flow stream
over the next five years:

1 2 3 4 5

-$1,038,746 -$962,647 $276,266 $875,381 $1,834,248

The company discounts all cash flows at a 20.6 percent discount rate

-$1,038,746 -$962,647 $276,266 $875,381 $1,834,248

PV = + + + +
1.206 (1.206)2 (1.206)3 (1.206)4 (1.206)5

= -$861,315.09 - $661,869.62 + $157,501.80 + $413,816.58 + $718,987.79

= -$232,878.54
Question 8

Computing annuity payment: Kevin Winthrop is saving for a European holiday in three years.
He estimates that he will need $5,699 to cover his airfare and all other expenses for a week-long
holiday in Europe. If he can invest his money in an S&P 500 equity index fund that is expected to
earn an average return of 11.9 percent over the next three years, he will need to save $

every year, starting at the end of this year.

Future value of annuity = FVA = $5,699

Return on investment = i = 11.9%

Payment required to meet target = PMT

Using the FVA equation:

FVAn = PMT

$5,699 = PMT

PMT = =

= $1,690.52

Kevin has to save $1,690.52 every year for the next three years to reach his target of $5,699.

Q9.Future value of an ordinary annuity: Robert Hobbes plans to invest $20,333 a year at the
end of each year for the next seven years in an investment that will pay him a rate of return
of 11.5 percent. Hobbes will have $

at the end of seven years.

every year, starting at the end of this year.
Annual investment = PMT = $20,333

No. of payments = n = 7

Investment rate of return = 11.5%

Future value of investment = FVA7

FVAn = PMT
 = $20,333 = $20,3339.934922

= $202,006.7

Question 10

Present value with multiple cash flows: Sam Cervantes has just purchased some equipment
for his landscaping business. He plans to pay the following amounts at the end of the next five
years: $10,909, $12,906, $9,365, $10,636, and $13,955. If he uses a discount rate
of 6.924 percent, the cost of the equipment he purchased today is $

$10,909 $12,906 $9,365 $10,636 $13,955

PV = + + + +
1.06924 (1.06924)2 (1.06924)3 (1.06924)4 (1.06924)5
= $10,202.57 + $11,288.63 + $7,660.94 + $8,137.25 + $9,985.13

= $47,274.52