Tarun Singh

1745 Problem Set 1

1. A) FV = 1000((1+r)4)t
FV = 1000((1.02)4)3 = $1268.24
B) PV = 100/(r)
PV = 100/.08 = $1250
The future value of the scenario in A is greater than the present value of the
perpetuity in B.

2. A) PV = 10/(r)
PV = 10/(.1) = $100 @ r=10%
PV = 10/(.07) = $142.8 @ r=7%
B) PV = D1 + (D/(r-g))
PV = (5/(.10-.04)) = $83.33 @ r=10% and g=4%
PV = (5/(.07-.04)) = $166.67 @ r=7% and g=4%
C) PV = (D/(r-g))(1-(((1+g)t)/((1+r)t)))+(D((1+g)t)/r)/((1+r)t)
PV = (5/(.1-.2))(1-(((1.2)5)/((1.1)5)))+(5((1.2)5)/.1)/((1.1)5) = $104.51 @
r=10% and g=20%
PV = (5/(.07-.2))(1-(((1.2)5)/((1.07)5)))+(5((1.2)5)/.07)/((1.07)5) = $156.50
@ r=7% and g=20%
Thus stock C is more valuable when r=10% and stock B is more valuable
when r=7%

3. $2000000 = C(1+r)t
$2000000 = C(1.15)30
C = $30266.11

4. A) NPV = -100+75/(1+r)+50/((1+r)2)–50/((1+r)3)+75/((1+r)4)+50/((1+r)5)
NPV = -100+75/(1.07)+50/((1.07)2)–50/((1.07)3)+75/((1.07)4)+50/((1.07)5)
= $65.82 @ r=7%
B) NPV = -100+75/(1+r)+50/((1+r)2)–50/((1+r)3)+75/((1+r)4)+50/((1+r)5)
 r NPV in $
7.00% 65.81695
5.00% 74.46716
10.00
% 54.21047
15.00
% 37.88909
20.00
% 24.54990
25.00
% 13.50400
30.00
% 4.24584
35.00
% -3.60092
40.00 -10.3201
% 0
45.00 -16.1285
% 0
50.00 -21.1934
% 0

The Internal Rate of Return is the interest rate at which the NPV=0. The graph
and the table above show that the IRR is in between 30% and 35%, and the
graph suggest that it is probably around 33%.

Note: NPV for the different interest rates were calculated in Excel