Case Assignment Questions

Case Assignment Questions: Single Cash Flow: Future Value 1. You currently have AED40,000 and plans to purchase a 5-year certificate of deposit (CD). a. How much will you have when the CD matures if it pays 7% interest, compounded annually? b. How much will you have when the CD matures if it pays 6%, or 20% interest, compounded annually? c. How much will you have when the CD matures if it pays 6%, or 20% interest, compounded semiannually? d. Why does the annual compounding and semiannual compounding give different answers? Would you prefer annual compounding or semiannual compounding or quarterly compounding for your investments? e. How much will you have when the CD matures if you purchase a 10-year CD that pays 7% interest, compounded annually? f. Do you observe any relationship between the period of investment and the future value? Single Cash Flow: Present value: 2. You just received notification that you have won the AED5 million first prize in the ‘Emirates Future Oriented Lottery’. However, the prize will be awarded on your 60 th birthday (assuming you are around to collect), 40 years from now. What is the present value of your windfall if the appropriate discount rate is 8 percent? Multiple Cash Flows: Future Value 3. You are planning to deposit into your bank deposit account AED1,000 at the end of 1 year, AED2,000 at the end of year 2, and AED3,000 at the end of year 3. What will be the value of your investment at the end of year 4, if the interest rate is 9%? Multiple Cash Flows: Present Value 4. An investment will pay AED1000 at the end of each of the next 4 years, AED2000 at the end of Year 5 and AED3000 at the end of Year 6. If other investments of equal risk earn 7% annually, what is the investment’s present value? 5 Annuities: Future Value 5. Find the future value of the following ordinary annuities. a. FV of $1,000 each year for 5 years at a nominal rate of 12%, compounded annually b. FV of $500 each 6 months for 5 years at a nominal rate of 12%, compounded semiannually c. FV of $250 each 3 months for 5 years at a nominal rate of 12%, compounded quarterly d. The annuities described in parts a, b and c have the same amount of money paid into them during 5-year period, and earn interest at the same nominal rate. Is the future value same or different, if different what is the reason? Annuities: Present Value 6. Your uncle named you as the beneficiary of his life insurance policy. The insurance company gives you a choice of AED300,000 today or a 15-year annuity of AED30,000 at the end of each year. Which one will you accept, if the discount rate is 7%. Why? Perpetuity 7. What is the present value of a perpetuity of AED1,000 per year if the appropriate discount rate is 6%? b) If interest rates in general were to double and the appropriate discount rate rose to 12%, what would happen to the present value of the perpetuity?

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