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PROBLEM 1 Find the following values for a lump sum:

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PROBLEM 1 Find the following values for a lump sum: – The future value of $500 invested at 8 percent for one year
– The future value of $500 invested at 8 percent for five years

– The present value of $500 to be received in one year when the opportunity cost rate is 8 percent

– The present value of $500 to be received in five years when the opportunity cost rate is 8 percent assuming:

a. Annual compounding

b. Semiannual compounding

c. Quarterly compounding

PROBLEM 2

Consider the following investment cash flows:

Year Cash Flow

0 -$1,000

1 $250

2 $400

3 $500

4 $600

5 $600

a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is 10 percent?

b. Provide an explanation, in economic terms, of your answer.

c. What is the return on this investment measured in percentage terms?

d. Should this investment be made? Why?

 
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