What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used to evaluate all potential investments?
If a firmââšÂ¬Ã¢žÂ¢s earning per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
Would you rather have a saving account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
Problems 4-3, 4-7, 4-10, 4-29
Your parents retire at 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they donââšÂ¬Ã¢žÂ¢t save any additional funds?
An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investmentââšÂ¬Ã¢žÂ¢s present value? Its future value?
Use both the TVM equations and a financial calculator to find the following values. See the Hint for Problem 4-9. (HINT from problem 4-9 ââšÂ¬Ã¢â‚¬Å“ If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can ââšÂ¬Ã…œoverrideââšÂ¬ the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer.)
a) An initial $500 compounded for 10 years at 6%
b) An initial $500 compounded for 10 years at 12%
c) The present value of $500 due in 10 years at a 6% discount rate
d) The present value of $500 due in 10 years at a 12% discount rate
Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of 10,000 as part of the payment. The mortgage has a quoted (or normal) interest rate of 10%; it calls for payments every 6 months, beginning on June 30, and is to be amortized over 10 years. Now, 1 year later, your aunt must inform the IRS and the person who brought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.)
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