Question 1:

If you invest $200 in a bank at 4% interest for 5 years, how much will you have at the end of five years?

Question 2:

In relation to Question 1, if instead of investing a single $200, you instead invest $200 for each of the next 5 years (you deposit $1,000 total), how much will you have at the end of 5 years. Remember, you are earning 4% interest.

Question 3:

You grandmother has promised to give you $30,000 in 10 years. You figure that you can earn 10% a year (In other words, r=10%). What is the $30,000 worth to you in today’s dollars?

Question 4:

In relation to Question 3, instead of giving you $30,000 in 10 years, your grandmother agrees to give you $3,000 for each of the next 10 years. What is this worth in today’s dollars? r=10%

Question 5:

You make $300 dollars selling your old comic books to four guys who work at a University. You put $100 in the bank at 3% interest, and keep the other $200 under your mattress, and never use it. How much money, in total, will you have one year later?

Question 6:

Charles Wagon (his friends call him Chuck), is a first round draft choice of the Cleveland Browns. You are Chuck’s agent. The Browns are proposing two deals:

- Offer 1: $4 million a year for the next 5 years.

- Offer 2: $8 million now and $2 million a year for 5 years.

The interest rate is 10%.

Which is the better deal? Show the numbers.

(Hint: Bring everything back to today’s dollars.)

Question 7:

Briefly describe, in your own words, what Capital Budgeting is.

Question 8:

Briefly describe, in your own words, the disadvantages of the Payback Method in Capital Budgeting.

Question 9:

What is the rule regarding Net Present Value? When should a project be accepted using this rule?

Question 10:

A Broadway show will cost $17,000,000 to put on and will require that the entire investment be spent up front. The show is then expected to bring in $5,000,000 a year for four years.

The investors estimate that they can earn 7% a year on their money if it is not invested in this show. Calculate the Net Present Value of investing in this show and state whether or note the investors should or should not make this investment and why.

Please see the Net Present Value Calculators in the Resources section in the instructions download.