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# MBA September Intake HEC Paris

## Financial Markets Philippe Henrotte

Homework of Lecture 2
Net Present Value
Khanh NGUYEN DINH

## answers to be submitted electronically on

www.henrotte.fr
before midnight Sunday 14 October 2018

## General Questions (3 points)

Question 1. (1 point) Your son is currently ten years old. You anticipate that he will
be going to college in 8 years. You would like to have USD 100,000 in a savings account
to fund his education at that time. If the account promises to pay a fixed interest rate of
2.96% per year, how much money do you need to put into the account today to ensure that
you will have USD 100,000 in 8 years? Give your answer rounded to the nearest Dollar.

Question 2. (1 point) You are thinking of building a new machine that will save you EUR
10,000 in the first year. The machine will then begin to wear out so that the savings decline
at a rate of 1.97% per year forever. What is the present value of the savings if the interest
rate is 5.00% per year? Give your answer rounded to the nearest Euro.

Question 3. (1 point) A rich alumni has created a trust for his university. It will pay the
university USD 15,000 three years from today. In addition, each year after that, the trust
will pay an amount (on the anniversary of the last payment) that is 1.98% larger than the
last payment for ever. If the interest rate is 4.88%, what is the value of the gift from the

## Problem 1. Long Term Saving (3 points)

Your grandfather put some money in a bank account for you on the day you were born.
You just turned 18 years old and you are allowed to withdraw the money for the first time.
The account currently has EUR 43,507 in it and pays a annual percentage rate of 6.85%
which is quarterly compounded. For each question, give your answer rounded to the nearest
Euro.

Question 4. (1 point) How much money would be in the account if you left the money

Question 5. (1 point) How much money did your grandfather originally put in the account?

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Problem 2. Stream of Cash Flows (2 points)

You have just received a windfall from an investment you made in the business of a friend.
He will be paying you USD 10,000 at the end of this year, USD 20,000 at the end of the
following year, and USD 30,000 at the end of the year after that (three years from today).
The interest rate is 3.25% per year. For each question, give your answer rounded to the
nearest Dollar.

## Question 6. (1 point) What is the present value of your windfall?

Question 7. (1 point) What is the future value of your windfall in three years (on the date
of the last payment)?