Posted: February 5th, 2019

FIN 305:Financial Get research paper samples and course-specific study resources under   homework for you course hero writing service – Manage ment of the Business Enterprise (Fall 2014) Homework #2

FIN 305:Financial
Get research paper samples and course-specific study resources under   homework for you course hero writing service – Manage ment 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?