Chapter Questions
What is the basic principle underlying the conversion of cash flows into their present values using a suitable discount rate? Give two aspects of the rationale for this principle.
Explain the difference between present value and future value.
A company invests $$\$ 400,000$$ at the beginning of the year and receives $$\$ 450,000$$ at the end of the year. What is the rate of return?
What are the basic conditions that should be satisfied to enable the use of the ordinary annuity formula?
An investment costs $$\$ 2,000$$ and pays $$\$ 200$$ per annum in perpetuity. If the interest rate is $8 \%$ per annum, what is the NPV?
If you invest $$\$ 500$$ at the end of each of the next five years at an interest rate of $12 \%$ per annum, how much will you have at the end?
An investment of $$\$ 250$$ will produce $$\$ 350$$ in two years. What is the annual interest rate?
If the present value of $$\$ 145$$ is $$\$ 125$$, what is the discount factor over one year?
A project's capital outlay is $$\$ 2,500$$. It produces net cash inflows of $$\$ 450$$, $$\$ 3,000$$, $$\$ 2,500$$ and $$\$ 300$$ in years $1,2,3$ and $4$ respectively. The discount rate is $8 \%$ per annum. What is the NPV? What is the IRR?
Recalculate the NPV of the project in Question 5.9 with the discount rates now varying between years: $\mathrm{Y} 1,9.2 \% ; \mathrm{Y} 2,10.5 \% ; \mathrm{Y} 3,11.7 \% ; \mathrm{Y} 4,8.62 \%$.
Refer to the information in Example 5.15. What is the amount of the loan outstanding after seven years of repayments?
Refer to Example 5.15. Demonstrate that you can arrive at the same answer for the three months' penalty interest (early redemption fee) by an alternative calculation procedure. Go through the following steps:(a) Calculate the principal outstanding after six years.(b) Calculate the principal outstanding after six years and three months.(c) Subtract (b) from (a).(d) Calculate the amount equal to three monthly payments.(e) Take away the answer to (c) from (d).