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##### Pennsylvania State FIN 305 Homework #2 Fall 2014 Assignment

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Question;Homework #2 (Individual, Due 10/16): Advanced Present Value Tools1. 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 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 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?

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