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FIN 305:Financial Management of the Business Enterprise (Fall 2014) Homework #2




Question;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. You?re 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 project?s cash flows if the opportunity cost of;capital is 9%?;6. It is;December 2015 and you are thinking about whether to start a Master?s 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 don?t 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 don?t foresee a raise for the first 3 years, but after the 3rd;year you expect to get a 15% raise. You expect another 25% raise after the 10th;year and constant salary after that.;The master?s;program costs $70,000 (paid when you start) and takes exactly 1 year. With a;master?s 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?


Paper#47894 | Written in 18-Jul-2015

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