CORPORATE FINANCE

72-HOUR ASSIGNMENT
Note:

- This assignment covers session 4 – Discounted Cash Flows Valuation.

- Cover sheet and peer review form must be attached.

Question 1 [8 marks]

Today, You are going to sign a 5-year contract to rent an apartment that requests an annual
payment of $20,000 per year. The contract will be implemented early next year, so you will need
to withdraw the first $20,000 one year from today. Your family plans to deposit in a bank saving
account with a 10 percent interest rate ansd expect that amount to be able to satisfy a full
payment schedule. The deposit will be made today.

a. How large must the deposit be? [4 marks]

b. How much will be in the account immediately after you make the first withdrawal? After the
last withdrawal? [4 marks]

Question 2 [6 marks]

You have $20,000 to invest for 10 years.

a. How much additional interest will you earn if the investment provides a 10% annual return,
compared to a 8% annual return? [2 marks]

b. How long will it take your $20,000 to double in value if it earns 10% annually? [2 marks]

c. What annual rate has been earned if $5,000 grows into $8,000 in 10 years? [2 marks]

Question 3 [6 marks]

As winner of a Mathematics competition, you can choose one of the following prizes:
a. $100,000 now.

b. $180,000 at the end of five years.

c. $11,400 a year forever.

d. $19,000 for each of 10 years.

e. $6,500 next year and increasing thereafter by 5% a year forever.

If the interest rate is 12%, which is the most valuable prize? (Note: You will need to find the
present value of each option and compare).