Problem 1: Present Values. For each of the cases shown in the following table, calculate the present value of the cash flow, discounting at the rate given and assuming that the cash flow is received at the end of the period noted.
Case Single Cash flow Discount rate End of period (years)
A $7000 12% 4
B 28000 8 20
C 10000 14 12
D 150,000 11 6
E 45,000 20 8
Problem 2: Present Value Concept. Answer each of the following questions.
a. What single investment made today, earning 12% annual interest, will be worth $6,000 at the end of 6 years?
b. What is the present value of $6,000 to be received at the end of 6 years if discount rate is 12%
c. What is the most you would pay today for a promise to repay you $6,000 at the end of 6 years if your opportunity cost is 12%?
d. Compare, contrast and discuss your findings in parts a through c.
Problem 3: Time Value. Jim Nance has been offered a future payment of $500 three years from today. If the opportunity cost is 7% compounded annually, what value should he place on this opportunity today? What is the most he should pay to purchase this payment today?
Problem 4: Time Value. An Iowa state saving bond can be converted to $100 at maturity 6 years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 8% annual interest (compounded annually), at what price must the state sell its bonds? Assume no cash payments on saving bonds prior to redemption.