Fin301 Module 2 Case Assignment
TUI UNIVERSITY
Module 2 Case Assignment
FIN301 - Principles of Finance
Dr. Alan Harper
March 5, 2011
Part I:
A. Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 4%?
Present Value at 7%
$15,000/1.07=$14,018.69
Present Value at 4%
$15,000/1.07=$14,423.08
B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $6,500.00 in one year. Account B will be worth $12,600.00 in two years. Both accounts earn 6% interest. What is the present value of each of these accounts?
Account A
$6,500.00 /1.06=$6,132.08
Account B
$12,600.00 /1.062=$11,886.79
C. Suppose you just inherited an gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:
Year 1: $49,000,000
Year 2: $61,000,000
Year 3: $85,000,000
Compute the present value of this stream of income at a discount rate of 7%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this gold mine at a 7% discount rate but you have to show how you got to this number.
At 7% discount rate
$49,000,000/(1.07)+ $61,000,000/(1.07)2+$85,000,000/(1.07)3=$168,459,474.48 $45,794,392.52 + $53,279,762.42 + $69,385,319.54
Now compute the present value of the income stream from the gold mine at a discount rate of 5%, and at a discount rate of 3%. Compare the present values of the income stream under the three discount rates and write a short paragraph with conclusions from the computations.
At %5
Module 2 Case Assignment
FIN301 - Principles of Finance
Dr. Alan Harper
March 5, 2011
Part I:
A. Suppose your bank account will be worth $15,000.00 in one year. The interest rate (discount rate) that the bank pays is 7%. What is the present value of your bank account today? What would the present value of the account be if the discount rate is only 4%?
Present Value at 7%
$15,000/1.07=$14,018.69
Present Value at 4%
$15,000/1.07=$14,423.08
B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth $6,500.00 in one year. Account B will be worth $12,600.00 in two years. Both accounts earn 6% interest. What is the present value of each of these accounts?
Account A
$6,500.00 /1.06=$6,132.08
Account B
$12,600.00 /1.062=$11,886.79
C. Suppose you just inherited an gold mine. This gold mine is believed to have three years worth of gold deposit. Here is how much income this gold mine is projected to bring you each year for the next three years:
Year 1: $49,000,000
Year 2: $61,000,000
Year 3: $85,000,000
Compute the present value of this stream of income at a discount rate of 7%. Remember, you are calculating the present value for a whole stream of income, i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number - the present value for this gold mine at a 7% discount rate but you have to show how you got to this number.
At 7% discount rate
$49,000,000/(1.07)+ $61,000,000/(1.07)2+$85,000,000/(1.07)3=$168,459,474.48 $45,794,392.52 + $53,279,762.42 + $69,385,319.54
Now compute the present value of the income stream from the gold mine at a discount rate of 5%, and at a discount rate of 3%. Compare the present values of the income stream under the three discount rates and write a short paragraph with conclusions from the computations.
At %5
Bibliography: Associated Press. (2008, April 1). Stations hope you fill up with more than gas. Retrieved March 25, 2011, from MSNBC.com Business News: http://www.msnbc.msn.com/id/23904590/ns/business- consumer_news/ Occupational Outlook Handbook, 2010-11 Edition: Real Estate Brokers and Sales Agents. (2011). Retrieved March 5, 2011, from U.S. Bureau of Labor Statistics : http://www.bls.gov/oco/ocos120.htm Rose, T. (2009, August 12). Debt Causes Weight Gain. Retrieved March 5, 2011, from Suite101.com: http://www.suite101.com/content/debt-causes-weight-gain-a138664