FIN 502 Chapter 2: Chapter 2.docx

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jademallard37

14 Mar 2012

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Rate of return: used to compare different investments and loans: different ways in which one can calculate it which often leads to misleading ads. Holding period returns and multiple period rates of return. Discount bond: an investment that pays no interest during its lifetime; therefore, the interest you receive on it is part of the final payment. Discount rate: interest rate or rate of return that we use to equate amounts of money paid or received in different periods. Opportunity cost: is what you earn if you don"t spend the money today. The discount rate simply tells you in monetary value the amount that you are giving up- the opportunity forgone- in order to consume now (the rate that makes us indifferent between present and future amounts) Ex: if you spend . 09 on clothes today, you have the clothes and can start wearing them now.

Related Questions

Time value - Jim Nance has been offered an investment that will pay him $400 four years from today.

a. If his opportunity cost is 6% compounded annually, what value should he place

on this opportunity today?

b. What is the most he should pay to purchase this payment today?

c. If Jim can purchase this investment for less than the amount calculated in

part a, what does that imply about the rate of return that he will earn on the

investment?

whitebutterfly400

Which of the following five statements are correct?

The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is about 8.3%.

Fundamentally, interest rates are determined by the Federal Reserve (central bank).

The rate of growth of your purchasing power is determined by the nominal interest rate.

Real interest rates indicate the rate at which your money will grow if invested for a certain period.

The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.

Which of the following five statements are correct?

When the risks of two projects are different, only the NPV rule will give a reliable answer.

When the risks of two projects are different, only the IRR rule will give a reliable answer.

The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.

The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is the profitability index.

Kate Snead has been offered four investment opportunities, all equally priced at $45,000. Because the opportunities differ in risk, Kate's required returns (i.e., applicable discount rates) are not the same for each opportunity. The cash flows and required returns for each opportunity are summarized below.

Opportunity	Cash Flows		Required Return

A	$8,500 at the end of 5 years		13%
B	End of Year	Amount	14%

	1	$10,000
	2	13,000
	3	19,000
	4	11,000
	5	12,000
	6	10,000
C	$5,500 at the end of each year for the next 30 years.		9%
D	$7,000 at the beginning of each year for the next 20 years.		18%

Find the present value of each of the four investment opportunities. Round your answer to two decimal places.
Investment A: $
Investment B: $
Investment C: $
Investment D: $

Which, if any, opportunities are acceptable?

Which opportunity should Kate take?

FIN 502 Chapter 2: Chapter 2.docx

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