Finical

Fin 5213 Financial Management Dr. Ying-Chou Lin

Week2 Written Assignment Questions

1. If you assume market interest rates are expected to increase over the term of the loan, would you prefer a loan with a fixed interest rate for the life of the loan or rather a loan with a variable rate that changes in response to market interest rate? (Assume that both loans start with the same interest rate.) Would your answer change if market interest rates are expected to decrease over the term of the loan? (4 points)

1. A person plans to retire today and expects to begin living off $50,000 received annually beginning one year from now and continuing until death. The person currently has $550,000 in savings that earns 10% interest annually. How long will the savings be able to accommodate this retirement plan? (4 points)

1. Suppose you make monthly mortgage payments of $2,545 and have 12 years left on the mortgage (next payment due next month). Assuming a 5.6% stated annual interest rate for the mortgage, how much would you need today to pay off the mortgage? (4 points)

1. You are considering a unique investment opportunity. If you invest $10,000 today, you will receive $1,000 one year from now, $1,500 two years from now, and $15,000 ten years from now.

1. 1. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity? (4 points)

   2. What is the NPV of the opportunity if the interest rate is 8% per year? Should you take it now? (4 points)

1. David West has been working on a new technology to improve manufacturing performance. His technology will be available in the near term. He estimates his first annual cash flow from the technology to be $500,000, received three years from today. Subsequent annual cash flows will grow at 5 percent in perpetuity. What is the present value of the technology if the discount rate is 10 percent? (4 points)

1. Consider a firm with a contract to sell an asset for $150,000 five years from now. The asset costs $75,000 to produce today. Given a relevant discount rate on this asset of 10 percent per year, will the firm make a profit on this asset? (3 points )At what rate does the firm just break even? (3 points)

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