FIN 305: Financial Management of the Business Enterprise (Fall 2014);Homework #2 (Individual, Due 10/16): Advanced Present Value Tools;1. If the discount rate is 9%, then what is the present value of a $200 perpetuity with the;first payment in four years? Recompute your answer assuming that the first $200;payment grows at 6% per year forever.;2. What is the present value of a 9-year $400 annuity with the first of the 9 payments;today? The discount rate is 4%. Recompute your answer assuming that the first $400;payment grows at 2% per year for the life of the annuity.;3. You estimate that by the time you retire, you will have accumulated $1.8mln in;savings. If the interest rate is 4% and you live 30 years after retirement, what annual level;of expenditure will those savings support?;4. Youre saving for retirement. You think you need an income of $80,000 per year for 30;years after retirement and you have 40 years to go until retirement. How much money;would you need to have saved today to not need to contribute any more money for the;next 40 years if the interest/investment rate is 8% both before and after retirement?;5. A projects cash flows are $100,000 per year from years 1 through 6. Between years 6;and 7 these cash begin to grow at 5%. You expect this growth to continue forever. What;is the present value (at time 0) of the projects cash flows if the opportunity cost of capital;is 9%?;6. It is December 2015 and you are thinking about whether to start a Masters program or;begin work come Jan. 1. Either way, you plan to work for 30 years before retiring (so you;will retire a year earlier if you dont go to school).;If you were to start work now you expect your starting salary to be $50,000. Due to the;poor economy you dont foresee a raise for the first 3 years, but after the 3 rd year you;expect to get a 15% raise. You expect another 25% raise after the 10 th year and constant;salary after that.;The masters program costs $70,000 (paid when you start) and takes exactly 1 year. With;a masters degree you believe that your starting salary will be $65,000 per year. You also;think that you will learn some skills that will increase your bargaining power in salary;negotiations. Thus, you believe that if you get a Masters your salary will grow steadily at;3% per year for your entire working life.;Assuming the discount rate is 10% and that all wages are paid at the end of the year, what;is the difference in present value between your wages going to school and not going to;school? If all you care about are these wages should you go to school? What is the most;you would be willing to pay for school under the wage assumptions in the problem?
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