EXTRA CREDIT PROBLM SET # 1 (25 points) Show all work/formulas Due NLT Class at

Question

EXTRA CREDIT PROBLM SET # 1 (25 points) Show all work/formulas Due NLT Class at Week 5 L. FUNDAMENTALS OF MANAGERIAL ECONOMICS-TIME VALUE OF MONEY Jim was promised a payment of $20,000 in 3 years in exchange for helping to take care of his grandfather now, what is the Present Value of that payment at 6% interest? 1. 2. Rewarding Insights, LLC current annual profits are $20,000. If they anticipated a 2% growth rate in profits and a long-term interest rate of 3%, estimate the Present Value of the firm. Molly has been told that if she can sell enough widgets annually, she will be in line for the following bonuses over the course of the next 3 years: 3. a. Year 1 -$10,000 b. Year 2-$15,000 c. Year 3 $20,000 With this data, calculate the Present Value of Molly's future bonus payments at 4% interest, assuming she will achieve her sales targets

Explanation / Answer

Answer 1.

Payment after 3 years = $20,000
Interest Rate = 6%

Present Value = Future Value / (1 + i)^n
Present Value = $20,000 / (1 + 0.06)^3
Present Value = $20,000 / 1.06^3
Present Value = $16,792.39

Answer 2.

Current Annual Profit = $20,000
Growth Rate = 2%
Interest Rate = 3%

Expected Annual Profit = Current Annual Profit * (1 + Growth Rate)
Expected Annual Profit = $20,000 * 1.02
Expected Annual Profit = $20,400

Present Value = Expected Annual Profit / (Interest Rate - Growth Rate)
Present Value = $20,400 / (0.03 - 0.02)
Present Value = $2,040,000

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