Assume that you are nearing graduation and have applied for a job at a bank. The

Question

Assume that you are nearing graduation and have applied for a job at a bank. The first section of the test addresses discounted cash flows analysis.

B) 1. Whats the future value of an intial $100 after 3 years if it is invested in an account paying 10% interest?

      2. Whats the present value of $100 to be received in 3 years if the appropriate interst rate is 10%?

C) We sometimes need to find out how long it will take a sum of money to grow to some specified amt. For example, if a compnay's sales are growing at a rate of 20% per year, how long will it take sales to double?

D) If you want an investment to double in 3 years, what interest rate must it earn?

F)   1) What is the future value of a 3 -years ordinary annuity of $100 if the approciate interst rate is 10%?

       2) What is the present value annuity?

       3) What would the future and present values be if the annuity were an annuity due?

Explanation / Answer

B)

1)

Future value = P×(1+r)^n

= $100×(1+10%)^3

= $133.1

2)

Present value= P×(1÷(1+r)^n)

= $100×(1÷(1+10%)^3)

= $75.13

C)

$200 = $100×(1+20%)×n

n = 5 years

D)

Future value = P×(1+r)^n

$200 = $100×(1+r)^3

Interest rate, r = 26%

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