Part A -

1. A local bank is offering 9% interest on savings accounts.  If you deposit $700 today and $600 in 3 years, how much will you have at the end of year 4?

2. You have just joined the investment banking firm of Knot, Wirthem, et al.  They have offered you two different salary arrangements.  You can have $50,000 per year for the next 3 years or $25,000 per year for the next 3 years, along with a $50,000 signing bonus today.  If the market interest rate is 16%, which salary arrangement do you prefer?  (Base your answer on present value)

3. You expect to receive an annuity of $1000 per year for the next five years.  The market rate of interest is 12%.  What is its present value?

4. Consider a perpetuity that pays $100 per year; the market rate of interest is 10%.  What is the PV of the perpetuity?

5. What is the total present value of all of the following cash flows?  (Assume 5% return) Hint - find each year individually and then add them all together to get a grand total

Year                                       Cash Flow

1                                              100

2                                              100

3                                              100

4                                              100

5                                              100

6                                              200

7                                              200

8                                              300

9                                              300

10                                           300

Part B -

1. If you deposit $1,000 today in a bank account paying 10%, how much will you have in one year?  If you need $2,000 in one year, how much do you have to deposit today (assume 10% return)?

2. An art collector has the opportunity to invest in bank certificates of deposit which pay 8% per year.  What is the future value of $150,000 if the collector elects to purchase a bank certificate of deposit for 10 years?

3. What is the present value of the sale if an art collector would receive $3.25 million when he sold a painting in 5 years?  Assume 6% return on investments.

4. An individual has the opportunity to invest $10,000 today to acquire an asset which can be sold for $18,000 in 3 years.  What interest rate will be earned?

5. The cash flows from an investment will be $200 one year from today (year 1) and $250 two years from today (year 2).  The market rate of interest is 10%.  Find the present value for this investment.  Hint - find the present value of each separately, then add them together.

6. The future value of an investment will be $14,500 in 5 years.  It is currently worth $11,000.  What is the interest rate that will be earned?

7. How many years will it take for $400 to grow to $912 at 6%?