Manajemen Keuangan – Asis 3

Ch 5 – The Time Value of Money | Ch 6 – Discounted Cash Flow Valuation

Question 1
The present value of the following cash flows is $ 6,550 if it is discounted at 10% annually. What is the value of
the lost cash flow in the following table?
Year 1 2 3 4
Cash Flow 1,600 ? 2,100 2,800
Question 2

You joined an investment banking company namely Valak Investama Corp. They offer you two forms of salary
payment. You will get $ 95,000 per year for two years or get $ 70,000 per year for the first two years plus a bonus
of $ 45,000 on the day of the contract signing. Bonuses are paid immediately, and salaries are paid at the end of
the year. If the interest rate is 8% compounded monthly, which choice should you make?

Question 3
Prepare an amortization schedule for a loan of $ 42,000 for 5 years. The interest rate is 8% annually. Calculate
the total interest of the loan if:
a. An agreement on fixed equal annual payments was agreed
b. A fixed principal payments agreement was agreed for $ 8,400 annually
c. Which form of agreement that provide lower total interest and why?

Question 4
You are said to be receiving $ 20,000 per year for the next five years. The applicable interest rate is 11% annually.
What is the present value if the payment is in the form of ordinary annuity? What is the present value if the
payment is in the form of annuity due? Which gives the highest present value and why?

Question 5
You are a financial planner. Your client is a newly married couple and wants to buy a house for $100,000 right
now. The interest recorded at the bank is 6% compounded monthly. The couple have agreed with the installment
scheme of the house for 20 years.
a. Help the couple calculate the monthly installments that the couple must pay.
b. Calculate the effective annual rate (EAR).

Question 6
Given an interest rate of 6.2 percent per year, what is the value at date t = 7 of a perpetual streams of $3,500
payment that begins at date t = 15?

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Manajemen Keuangan – Asis 3
Ch 5 – The Time Value of Money | Ch 6 – Discounted Cash Flow Valuation
Question 7
Calculate the present value of an investment that gives inflows of Rp300 at the end of year 1 to year 5. Then at
the end of year 6 is an expenditure of Rp300. And provide inflow at the end of year 7 to year 10 of Rp500. Use a
discount rate of 5%.

Question 8
First National Bank charges 14.2 percent compounded monthly on its business loans. First United Bank charges
14.5 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

Question 9
Barcain Credit Corp. wants to earn an effective annual return on its consumer loans of 16 percent per year. The
bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential
borrowers? Explain why this rate is misleading to an uninformed borrower.

Question 10
Beginning three months from now, you want to be able to withdraw $2,300 each quarter from your bank account
to cover college expenses over the next four years. If the account pays .65 percent interest per quarter, how much
do you need to have in your bank account today to meet your expense needs over the next four years?

Question 11
Suppose a German company issues a bond with a par value of €1,000, 25 years to maturity, and a coupon rate of
6.4 percent paid annually. If the yield to maturity is 7.5 percent, what is the current price of the bond?

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Manajemen Keuangan – Asis 3
Ch 5 – The Time Value of Money | Ch 6 – Discounted Cash Flow Valuation
Future value (FV): The amount an investment is worth after one or more periods.
Compounding: The process of accumulating interest on an investment over time to earn more interest.
Interest on Interest: Interest earned on the reinvestment of previous interest payments.
Compound interest: Interest earned on both the initial principal and the interest reinvested from prior periods.
Simple interest: Interest earned only on the original principal amount invested.
Present value (PV): The current value of future cash flows discounted at the appropriate discount
rate.
Discount: Calculate the present value of some future amount.

Annuity: A level stream of cash flows for a fixed period of time.

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Manajemen Keuangan – Asis 3
Ch 5 – The Time Value of Money | Ch 6 – Discounted Cash Flow Valuation

Perpetuity: An annuity in which the cash flows continue forever.

Consol: A type of perpetuity.

Stated Interest Rate: The interest rate expressed in terms of the interest payment made each
period. Also known as the quoted interest rate.
Effective Annual Rate (EAR): The interest rate expressed as if it were compounded once per year.

Annual Percentage Rate (APR): The interest rate charged per period multiplied by the number of periods per
year.