CORPFIN 7005 - Principles of Finance (M)

Topic 3: Discounted cash flows and valuation

1. How do an ordinary annuity, an annuity due and a perpetuity differ?

2. What is the APR, and why are lending institutions required to disclose this rate?

3. Future value with multiple cash flows: You are first year at university and are planning a
trip to Canada when you graduate at the end of 4 years. You plan to save the following
amounts annually, starting today: $781, $627, $895 and $920. If the account pays 6.03
per cent annually, how much will you have at the end of 4 years?

4. Present value of an ordinary annuity: An investment opportunity requires a payment of

$592 for 12 years, starting a year from today. If your required rate of return is 8.8 per
cent, what is the value of the investment today?

5. Future value of an ordinary annuity: Silas Yeung is a sales executive at a Brisbane

company. She is 25 years old and plans to invest $2296 every year in a retirement savings
account, beginning at the end of this year until she turns 65 years old. If the retirement
savings investment will earn 11.31 per cent annually, how much will she have in 40 years
when she turns 65 years old?

6. Calculating annuity payment: The Bridge Bar & Grill has a 7-year loan of $23 500 with
Bankwest. It plans to repay the loan in 7 equal instalments starting today. If the rate of
interest is 8.4 per cent per annum, how much will each payment be worth?

7. Effective annual rate: Rajesh Sachdeva bought a Honda Civic for a price of $17 345. He
deposited $6000 and financed the rest through the dealer at an APR of 9.3 per cent for 4
years. What is the effective annual rate (EAR) if payments are made monthly?

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CORPFIN 7005 - Principles of Finance (M)

8. Present value with multiple cash flows: Polly Chan, a lottery winner, will receive the
following payments over the next 7 years. If she can invest her cash flows in a fund that
will earn 10.5 per cent annually, what is the present value of her winnings?

9. Effective annual rate: Which of the following investments has the highest effective annual
rate (EAR)?
a. A bank term deposit that pays 8.25 per cent compounded quarterly.
b. A bank term deposit that pays 8.25 per cent compounded monthly.
c. A bank term deposit that pays 8.45 per cent compounded annually.
d. A bank term deposit that pays 8.25 per cent compounded semiannually.
e. A bank term deposit that pays 8 per cent compounded daily (on a 365-day basis).

10. You have saved $4000 for a down payment on a new car. The largest monthly payment
you can afford is $350. The loan would have a 12 percent nominal rate based on end-of-
month payments. What is the most expensive car you could afford if you finance it for 48
months? For 60 months?

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