V361 Financial Management Homework 2 - Present Value Analysis

This document presents a detailed solution to a Finance homework assignment, focusing on key financial concepts. The assignment includes questions on present value, future value, and investment analysis. The solution provides step-by-step calculations, including the use of relevant formulas and data to determine the future value of investments in certificates of deposit and paintings, as well as the calculation of return on investment. Additional problems address present value calculations for various scenarios, including annuities and perpetuities, and calculating the effective annual rate (EAR). The assignment also covers the application of these concepts to real-world investment decisions and cash flow analysis. The solutions demonstrate the application of financial formulas and provide a comprehensive understanding of time value of money principles.

Financial Management

FINANCE 1
Question 1
1.1
Given
Investment Outplay (Present
Value) $2 Million
Selling $2.18 million
Interest rate 10%
N 1
R 10% or 0.10
FV PV(1+R)n
200000*(1+0.10)1
FV of CD 220000
1.2
As per the evaluation, it is observed that the FV of CD is high such as 220000 as compare to the
FV of Painting. Investment in painting is not a good idea for the company in terms of
investment.
1.3

FINANCE 2
Data Given
PV (Investment Cost) 200000
N 1
FV 218000
ROI Gain
Investment Cost
218000-200000
200000
ROI 18000
200000 9%
Question 2
2.1
Given
Cash Flow in 1st year $114
Cash Flow in 2nd year $44
Rate of Return 20%
Number of Periods (n) 2
R 10% or 0.10

FINANCE 3
PV
PV(nper, rate, pv,
pmt)
PV in first year $174.17
PV in second year $67.22
2.2
This investment is not acceptable as its initial outlay is high as compare to the future value
(Calculator, 2018). It is observed that the investor can face the loss due to high amount of
investment and less amount of return.
Question 3
3.1
Given
Present Value ?
Years 7
Interest Rate 13%
FV 498
PV(nper, rate, fv pmt)
PV $211.68
3.2

FINANCE 4
Given
Present Value $123
Years 13
Interest Rate 13%
FV ?
FV(nper, rate, pv, pmt)
FV $602.46
3.3
Given
Present Value $100
Years ?
Interest Rate 12%
FV $348
NPER(rate, pmt, pv, fv)
Years 11.00
3.4
Given
Present Value $100
FV $466
Interest Rate ?

FINANCE 5
Years 20
Interest Rate 8%
3.5
Given
Number of times 2 (Semiannually)
Interest Rate 5%
Years 20
EAR (1+ i/n)n – 1
((1+0.5/2)*(1+0.5/2))-1
56%
Question 4
4.1
Given
Data
Perpetuity $100 per year
Market
Rate 10%

FINANCE 6
PV Perpetuity
Rate
$100
0.1
PV $1,000
4.2
PV factor 1/(1+rate)n-1
2.73
PV of
perpetuity C/r ((1/(1+r)n-1)
PV 366.67
4.3
PV factor 1/(1+rate)n-1
3.64
PV of "n" C/r ((1/(1+r)n-1)
PV 100.83
4.4

FINANCE 7
The value of perpetuity can change over time even the payment remains same. It is also change
when the discount rate has been change which is used by the company. If the discount rate used
lowers then the amount of denominator has been low which automatically decrease the value
(Finance Formula, 2019).
Question 5
5.1
A.
Given
Cash Flow in 1st year $678.09
Interest Rate 13%
Number of Years (n) 7
R 13% or 0.13
PV PV(rate, nper, pmt, [fv]
PV $2,998.93
B.
Given
Cash Flow in 2nd year $7,968.26
Rate of Return 6%

FINANCE 8
Number of Years (n) 13
R 6% or 0.6
PV
PV(rate, nper, pmt,
[fv]
PV $70,540.48
C.
Given
Cash Flow in 3nd year
$20,322.9
3
Rate of Return 4%
Number of Years (n) 23
r 4% or 0.4
PV
PV(rate, nper, pmt,
[fv]
PV $301,934.55
5.2

FINANCE 9
A.
Given
Cash Flow in 1st year $123.00
Interest Rate 13%
Number of Years (n) 13
R 13% or 0.13
FV
FV(rate, nper, pmt, pv,
(fv)
FV $3,688.12
B.
Given
Cash Flow in 1st year $4,555.00
Interest Rate 8%
Number of Years (n) 8
r 8% or 0.8
FV FV(rate, nper, pmt, pv,

FINANCE 10
(fv)
FV $48,449.84
C.
Given
Cash Flow in 1st year $123.00
Interest Rate 10%
Number of Years (n) 5
r 10% or 0.10
FV
FV(rate, nper, pmt,
pv, (fv)
FV $750.93

FINANCE 11
References
Calculator. (2018) Future Value Calculator. Retrieved From: https://www.calculator.net/future-
value-calculator.html
Finance Formula. (2019) PV of Perpetuity. Retrieved From:
https://financeformulas.net/Perpetuity.html