Questions
A. Explain what the time value of money means and why it would be important to a business owner.
B. What are the three elements of time value of money and why are each of them important?
C. How is risk involved in time value of money?
D. What are the pros and cons of NPV?
E. What are the pros and cons of IRR?
Exercises/Problems
A. If a business has a $500,000 outstanding loan at a 12% interest rate and pays a 6.75% annual dividend on it of $2,000,000 of equity capital, calculate the cost of capital.
B. To pay the startup expenses on her business, Brenda has withdrawn $10,000 from her savings account earning 2% interest and charged $15,000 on her credit card where the annual interest rate is 21%. What is Brenda's cost of capital? What is the minimum discount rate Brenda should consider for a net present value calculation?
C. If a business has a current cost of capital of 6% and plans on borrowing $100,000 at 8% for an investment opportunity and typically adds 5% to its minimum discount rate for risk, what discount rate should be used?
D. What is the future value of $10,000 invested for a year in a bank account paying 7% interest?
E. What is the present value of $100,000 received next year if the discount rate is 6%?
F. What is the present value of $100,000 received in three years if the discount rate is 12%?
G. What is the net present value of $50,000 received next year if the discount rate is 5% and investment amount is $45,000?
H. What is the present value of $200, $500, and $1,500 received over the next three years at a 10% discount rate? Assuming the initial investment amount is $1,200, what is the NPV?
I. Calculate the IRR on cash flows of $200, $500, and $1,500 received over the next three years if the initial investment is $1,200.
J. Considering your answer to #H and #I, which is the most accurate and/or reliable?