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Questions and Answers
What is the future value of an investment of €15,000 at the end of each year for 6 years at an annual interest rate of 5%?
What is the future value of an investment of €15,000 at the end of each year for 6 years at an annual interest rate of 5%?
- €103,645.00
- €90,000.00
- €82,000.00
- €107,285.20 (correct)
If the monthly interest rate is 0.4%, the total amount to be repaid for a €500,000 loan over 20 years will be less than double the borrowed amount.
If the monthly interest rate is 0.4%, the total amount to be repaid for a €500,000 loan over 20 years will be less than double the borrowed amount.
True (A)
What is the total cost of the oil pipeline installation?
What is the total cost of the oil pipeline installation?
£19,000,000
The present value of a future income stream can be calculated using the __________ formula.
The present value of a future income stream can be calculated using the __________ formula.
Match each investor with their main action regarding consumption:
Match each investor with their main action regarding consumption:
How much will be saved per year during the first five years of operation of the pipeline?
How much will be saved per year during the first five years of operation of the pipeline?
A down payment of 20% on a $2 million house would be $400,000.
A down payment of 20% on a $2 million house would be $400,000.
What is the annual interest rate on the mortgage for the house purchased in Sydney?
What is the annual interest rate on the mortgage for the house purchased in Sydney?
Flashcards
Present Value
Present Value
The current worth of a future sum of money or stream of cash flows, given a specific rate of return.
Future Value
Future Value
The value of an asset or investment at a specified date in the future.
Investment Stream
Investment Stream
A series of payments or cash flows that occur over a period of time.
Monthly Repayment
Monthly Repayment
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Net Present Value (NPV)
Net Present Value (NPV)
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Annual Interest Rate
Annual Interest Rate
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Two-Period Consumption Model
Two-Period Consumption Model
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Patient Investor
Patient Investor
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Impatient Investor
Impatient Investor
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Down Payment
Down Payment
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Loan Principal
Loan Principal
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Mortgage
Mortgage
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Monthly Compounding
Monthly Compounding
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Study Notes
Exam Revision
-
Investment Stream (Question 1):
- Invest €15,000 annually for 6 years.
- Annual interest rate 5%.
- Calculate present and future value.
-
House Loan (Question 2):
- Borrow €500,000 for a 20-year house loan.
- Monthly repayments required.
- Monthly interest rate 0.4%.
- Calculate monthly repayment.
-
Oil Pipeline Investment (Question 3):
- Oil pipeline installation cost £19,000,000.
- Installation takes 2.5 years.
- Half the cost paid at the end of each year.
- Annual savings: 3,000,000(first5years),3,000,000 (first 5 years), 3,000,000(first5years),2,000,000 (next 5 years), zero thereafter.
- Annual interest rate 5%.
- Decide if the company should invest. Justify.
-
Planned Savings (Question 4):
- Save £25,000 annually for 8 years.
- Annual interest rate 3%.
- Calculate the present value of the savings.
- Calculate the balance at the end of the 8-year period.
Investment Decisions (Exercise 2)
- Two-Period Consumption Model:
- Model considers now (t=0) and next year (t=1).
- Two investors: A (patient) and B (impatient).
- Investor A wants to maximize consumption at t=1.
- Investor B wants to maximize consumption now.
- Annual income of $200,000 today and zero income at t=1.
- Real investment opportunity: Cost 200,000now,returns200,000 now, returns 200,000now,returns215,000 at t=1.
- Risk-free borrowing and lending at 10%.
- Analyze investment decisions, cash flows, and consumption for each investor (real and financial).
- Discuss net present value (NPV) optimality.
House Mortgage (Exercise 3)
- Sydney House Purchase:
- House price $2,000,000.
- 20% down payment.
- 25-year mortgage financed remainder.
- Monthly payments.
- Annual interest rate 6% (monthly compounding).
- Calculate loan principal repaid in the first year (percentage of total annual payment).
- Determine if the percentage increases, decreases, or remains constant over subsequent years. Explain.
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