Professor
Corporate Finance
Professor H. Wang
Problem Set #1
1. Calculate the present value of the following cash flows discounted at 10 percent:
a. $1,000 received seven years from today.
b. $2,000 received one year from today.
c. $500 received eight years from today.
2. A firm has an estimated pension liability of $1.5 million due 27 years from today.
If the firm can invest in a risk free security that has a stated annual interest payment of 8 percent, how much must the firm invest today to be able to make the
$1.5 million payment?
3. You have the opportunity to make an investment that costs $900,000. If you make this investment now, you will receive $120,000 one year from today, $250,000 two years from today, and $800,000 three years from today. The appropriate discount rate for this investment is 12 percent.
a. Should you make the investment?
b. What is the net present value (NPV) of this opportunity?
c. If the discount rate is 11 percent, should you invest? Compute the NPV to support your answer.
4. Given an interest rate of 10 percent per year, what is the value at date = 5 (i.e., the end of year 5) of a perpetual stream of $120 annual payments starting at date = 9?
5. You have $100,000 to invest for six years. You can invest this at a rate of 7.67% compounded annually, at a rate of 7.52% compounded quarterly, or at a rate of
7.35% compounded monthly. Which of the three alternatives would give you the highest amount in six years?
6. The Wendy Group is a construction firm that specializes in building educational facilities. It has been approached by a large university concerning the construction of a library. Construction of the library is expected to take 3 years. The university will pay $40 million for the library in 4 yearly payments of $10 million each, the first of which is paid immediately and the last of which is paid three years from now when the library is completed. The Wendy group has two different
construction
Professor H. Wang
Problem Set #1
1. Calculate the present value of the following cash flows discounted at 10 percent:
a. $1,000 received seven years from today.
b. $2,000 received one year from today.
c. $500 received eight years from today.
2. A firm has an estimated pension liability of $1.5 million due 27 years from today.
If the firm can invest in a risk free security that has a stated annual interest payment of 8 percent, how much must the firm invest today to be able to make the
$1.5 million payment?
3. You have the opportunity to make an investment that costs $900,000. If you make this investment now, you will receive $120,000 one year from today, $250,000 two years from today, and $800,000 three years from today. The appropriate discount rate for this investment is 12 percent.
a. Should you make the investment?
b. What is the net present value (NPV) of this opportunity?
c. If the discount rate is 11 percent, should you invest? Compute the NPV to support your answer.
4. Given an interest rate of 10 percent per year, what is the value at date = 5 (i.e., the end of year 5) of a perpetual stream of $120 annual payments starting at date = 9?
5. You have $100,000 to invest for six years. You can invest this at a rate of 7.67% compounded annually, at a rate of 7.52% compounded quarterly, or at a rate of
7.35% compounded monthly. Which of the three alternatives would give you the highest amount in six years?
6. The Wendy Group is a construction firm that specializes in building educational facilities. It has been approached by a large university concerning the construction of a library. Construction of the library is expected to take 3 years. The university will pay $40 million for the library in 4 yearly payments of $10 million each, the first of which is paid immediately and the last of which is paid three years from now when the library is completed. The Wendy group has two different
construction