1) Suppose you deposit $ 2,000 today and your account will acuumulate to $ 4,000

Question

1) Suppose you deposit $ 2,000 today and your account will acuumulate to $ 4,000 in 10 years. What is the nominal annual rate of interest, given semiannual compounding?

a. 7.18%

b. 3.53%

c. 7.05%

d. 7.00%

e. None of the above

2) HKL Co. plans a new project that will generate $ 170,000 of continuous cash flow each year for 6 years and additionally $ 250,000 at the end of the project. If the continuously compounded rate of interest is 11%, estimate the present value of the cash flows.

a. 875897.13

b. 1170000

c. 1203567.13

d. 1356987.13

e. None of the above

Explanation / Answer

1). Let the annual interest rate be r.

Then 2000 * (1+r/2)^20 = 4000
(1+r/2)^20 = 2

(1+r/2) = 2^(1/20) = 1.035264
r/2 = 0.035264
r = 0.0705 or c. 7.05%

2).

PV = Integral from 0 to 6 of e-0.11t dt + PV of 250000 at 6th year

= 170000/-0.11[e^-0.11t]60 + 250000 e-6*0.11

= -170000/0.11[e-0.66 - e0] + 129212.8336

= -170000/0.11 * [0.516 - 1] + 129212.83

=  746,684.30 + 129212.83 =  875,897.13

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.