Calculate the present value, or net present value, of the future amount(s) to support your answer and show your work using either factors.

1. Suppose you have a project where you will invest $20,000 today and receive one payment $26,200 exactly 5 years in the future. If your opportunity cost rate (the return you could get on other investments of similar risk) were 5.0% per year, would you approve this project strictly from a financial standpoint, meaning is the PV of the future cash flow greater than the $20,000 initial investment? Explain why.
2. Change the example so that, rather than the $26,200 in in 5 years, you receive $4,600 at the end of each of the next 5 years. You still invest $20,000 at the beginning. What advantage does this offer have, relative to the first one? Would you approve this one? Explain why.
3. One more example. How about if you invest the same $20,000 but this time the offer is to pay you $1,900 per year to you (and your heirs) forever. Would you make that investment?
4. Based on the current unsettled economic conditions, your boss is not sure about the 5% opportunity cost. She wants you to also look at the possibility of a 3% rate and a 7% rate. What effect does changing the rates have on the acceptability of the projects?
5. From these examples, sum up what you have learned about the time value of money. Can you lay out some general rules about how changes in the inputs affect the output?

Answer rating: 100% (QA)

1 Initial cost20000 Payments26200 Tenor 5 Interest 5 Present val... View the full answer