Question

1. Time Value of Money You have been offered a unique investment opportunity. If you invest $20,000 today, you will receive $1000 one year from now, $3000 two years from now, and $20,000 ten years from now. a. What is the NPV of the investment opportunity if the interest rate is 12% per year? Should you take the opportunity? b. What is the NPV of the investment opportunity if the interest rate is 2% per year? Should you take the opportunity? 2. Interest Rates You are saving for retirement. To live comfortably, you decide you will need to save $1 million by the time you are 65. Today is your 23rd birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 5%, how much must you set aside each year to make sure that you will have $1 million in the account on your 65th birthday?

Answer 1

1

a

Inv
Discount rate	0.12
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-20000	1000	3000	0	0	0	0	0	0	0	20000
Discounting factor	1	1.12	1.2544	1.404928	1.5735194	1.762342	1.973823	2.210681	2.475963	2.773079	3.105848
Discounted cash flows project	-20000	892.8571	2391.582	0	0	0	0	0	0	0	6439.465
NPV = Sum of discounted cash flows
NPV Inv =	-10276.096
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Reject as NPV is negative

b

Inv
Discount rate	0.02
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-20000	1000	3000	0	0	0	0	0	0	0	20000
Discounting factor	1	1.02	1.0404	1.061208	1.0824322	1.104081	1.126162	1.148686	1.171659	1.195093	1.218994
Discounted cash flows project	-20000	980.3922	2883.506	0	0	0	0	0	0	0	16406.97
NPV = Sum of discounted cash flows
NPV Inv =	270.864
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Accept as NPV is positive

Please ask remaining parts seperately, questions are unrelated