Revision for the second mid-term exam
(211 FIN)
Exercises
1.What is the present value of a 3-year annuity of $100 if the discount rate is 6 percent?
2. You need to borrow $18,000 to buy a truck. The current loan rate is 9.9% per year and
you want to pay the loan off in equal monthly payments over 5 years. What is the size of your
monthly payment?

$363.39

$381.56

$374.04

$455.66

$394.69
3. Same exercise but the loan is compounded daily, what is the size of your daily payment?
4. Same exercise but the loan is compounded quarterly, what is the size of your quarterly
payment?
5. You have just won the lottery. You and your heirs will receive $25,000 per year forever,
beginning one year from now. If the present value of the lottery is $416667, what is the
discount rate used to value this perpetuity?

6%

5%

4%

8%

7%
6. Which of the following calculations takes the time value of money into account?
 Payback

Average rate of return

Profitability index
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7. You are analyzing two mutually exclusive projects with the following cash flows:
Year
0
1
2
3
4
A
-$4000
$2000
$1500
$ 1250
$1000
B
-$4000
$1000
$1500
$1700
$2400
a) Estimate the net present value of each project, assuming a cost of capital of 10%.
Which is the better project?
b) Estimate the average rate of return for each project. Which is the better project?
c) Estimate the payback period and the discounted payback period of each project ,
assuming a cost of capital of 10%. Which is the better project?
8. You are considering an investment with the following cash flows. Your required return is
10%, you require a payback of 3 years and a discounted payback of 4 years. If your
objective is to maximize your wealth, should you take this investment?
Year
0
1
2
3
4
5
Cash
Flow
-$100,000
$40,000 $40,000 $40,000 $40,000 -$50,000
 Yes, because the payback is 2.5 years.
 Yes, because the discounted payback is 4 years.
 Yes, because both the payback and the discounted payback are less than 2 years.
 No because NPV IS negative
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