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UNIVERSITY OF RUHUNA

GROUP ASSIGNMENT

Group 1

L.C.A.Pushpakumara PDBA/MBA 277

Question 01

A first-round draft choice quarterback has been signed to a three-year, $25 million contract.

The details provide for an immediate cash bonus of $2 million. The player is to receive $5

million in salary at the end of the first year, $8 million in the next, and $10 million at the end

of the last year. Assuming a 15 percent discount rate, is this package worth $ 25 million? If

not, how much is it worth?

Answer

This contract is not worth $ 25 million as cash receipt is happening in different times.

Calculation of present value of future cash flows using 15% discount rate.

Question 02

You plan to make a series of deposits in an individual retirement account. You will deposit

$1,000 today, $2,000 in two years, and $2,000 in five years. If you withdraw $1,500 in three

years and $1,000 in seven years, assuming no withdrawal penalties, how much will you have

after eight years if the interest rate is 7 percent? What is the present value of these cash

flows?

Answer

Calculation of present value of cash flows

PV = FV81/ (1+r) ^8

PV = $3995.911/(1+.07)^8

PV = $2325.65

Question 03

You are looking into an investment that will pay you $12,000 per year for the next 10 years.

If you require a 15 percent return, what is the most you would pay for this investment?

Answer

The most we are prepared to pay for this investment is the present value of future cash

inflows at 15% discount rate or in other words NPVat 15% = 0

PV = C/r(1- 1/(1+r)n)

PV = 12000/0.15(1-1/(1+0.15)10)

PV = $60225.22

Question 04

The going rate on students loans is quoted as 8 percent APR. The terms of the loans call for

monthly payments. What is the effective annual rate (EAR) on such a student loan?

Answer

EAR = (1+EPR/12)12 - 1

EAR = (1+0.08/12)12 - 1

EAR = 0.08299

EAR = 8.3%

Question 05

Suppose you borrow $10,000. You are going to repay the loan by making equal annual

payments for five years. The interest rate on the loan is 14 percent per year. Prepare an

amortization schedule for the loan. How much interest will you pay over the life of the loan?

Answer

PV = C/r( 1 1/(1+r)n)

C = 2912.84 = $2913

Question 06

Youve recently finished your MBA at the Darnit School. Naturally, you must purchase a new

BMW immediately. The car costs about $21,000. The bank quotes an interest rate of 15

percent APR for a 72-month loan with a 10 percent down payment, You plan on trading the

car in for a new one in two years. What will your monthly payment be? What is the effective

interest rate on the loan? What will the loan balance be when you trade car in?

Answer

= $2100

C = $399.64

Monthly installment = $399.64

EAR = (1+APR/12)12 - 1

EAR = (1+0.15/12)12 - 1

If the car is traded in after two years, loan balance at the end of two year could be calculated

in two ways. One way is to prepare a loan amortization schedule and take the closing balance

at the end of the second year year. But the easiest method is to calculate the present value of

remaining 48 installments.

PV = C/r (1 1/ (1+r) n)

PV = 399.64/0.15/12 (1 1/ (1+0.15/12)48)

PV = $14359.65

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