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Question#1
You have just received a $15,000 signing bonus from your new employer and decide to invest it for 2 years. Your banker suggests two alternatives, both of which require a commitment for the full 2 years. The first alternative will earn 8% per year for both years. The second alternative earns 6% for the first year and 10% for the second year. Interest compounds annually. Which alternative should you choose?
Question#2
You are the CFO of Termination, Inc. Your company has 40 employees, each earning a salary of $40,000/year. Employee salaries grow at 4% per year. Starting from next year, and every second year thereafter, eight employees retire and no new employees are recruited. Your company has in place a pension plan that entitles retired workers to an annual pension which is equal to their annual salary at the moment of retirement. Life expectancy is 20 years after retirement, and the annual pension is paid at year-end. The return on investment is 10% per year. What is the total value of your pension liabilities as of now?
Hint: The total value of your pension liabilities will be the sum of the PV of pension liability of each retirement cohort.
Question#3
Anna just turned 55. She is planning to retire in 10 years, and she currently has $500,00 in her 401k fund. She assumes that she will live 20 years past her retirement age. During each of these 20 years, she desires to withdraw $100,000 from her retirement fund. If the interest rate is 5% annually, how much will Anna have to save per year for the next 10 years (from 55 to 64)? Assume that the first deposit to her retirement fund will be today, followed by nine more annual deposits, and that the annual withdrawals from age 65 will occur at the beginning of each year.
Question#4
Your firm is considering two mutually exclusive projects with cash flows as indicated in the Excel file. A) What is the NPV and IRR for the two projects, respectively? B) Calculate the crossover rate.
Question#5
In purchasing a house that is worth $175,000, you need to obtain a mortgage. Suppose you choose a 30- year fixed rate mortgage with an interest rate/year of 9.74%. What is the annual payment required? How much of each year’s payment goes to paying interest and how much to reducing the principal balance?
Question#6
You are trying to decide whether to lease a car for four years or buy a new car now and sell it for four years later. The annual lease payment would be $6,300 with payments made at the beginning of each year. The new car price is $47,000 now. Four years later, you are expected to sell the car for $33,000. The appropriate discount rate for this project is 7.2%.
Should you buy or lease? Use the present value comparison method
May 22 2020 View more View Less
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