Question

1.What constant payment for the next 10 years (starting 1 year from now, 10 payments) would be equivalent to receiving $350 every other year starting 10 years from now. Assume the annual cost of capital is 13%.

2.Suppose you own two assets with the following payouts. (1) $250 at the end of every year starting 1 year from now. The annual cost of capital for these cash flows is 9%. (2) $650 one year from now and a cash flow that is 1% larger than the prior cash flow every year thereafter. The annual cost of capital for these cash flows is 9%. What is the weighted average cost of capital of this two asset portfolio? (enter your answer as a percent, e.g. 2.51. Do not include the "%" sign).

3.Suppose that you will need to save $1300000 over the next twenty years to retire comfortably. What constant annual payment (20 payments) will you need to make to save this amount if the you can earn 7% annually?

4.Suppose that you take out a loan for $150000 to purchase a house. You are required to make monthly payments, and the APR is 3.5%. How much interest will you end up paying over the life of the loan (30 year mortgage)?

5.Suppose that you are evaluating the following investment opportunity. At the end of the the next five years you estimate that you will receive the following cash flows, $700, $800, $600, $600, and $350. At the end of every year following year five you will receive a cash flow that is 5% larger than the prior cash flow. If the cost of capital is 8% how much should you be willing to invest in this opportunity?

Answer 1

1. Let the payment be x.

x*PVAF(13%, 10years) = (350/0.13)/(1+0.13)^10

x = ((350/0.13)/(1+0.13)^10)/5.42624

x = $146.16

Thus, the required payment is $146.16