CORPORATE FINANCE – TERM 2/2023

GROUP ASSIGNMENT 1
Note: The cover sheet must be attached.

Problem 1 (5 marks)
Lisa will join a company and sign a brand-new contract. The contract states that she will receive
$14,500,000 per year for five years. The appropriate interest rate is 7.1%.
a. What is the present value of the payments if:
- The payments are in the form of an ordinary annuity.
- The payments are an annuity due.
b. Suppose Lisa wants to invest the payments for five years in an emerging market. What is the future
value of her investment if:
- The payments are an ordinary annuity.
- The payments are an annuity due.
c. Which has the highest present value, the ordinary annuity or annuity due? Which has the highest
future value? Can you provide some comments about your findings?

Problem 2 (5 marks)
Rosie will invest $1,500,000 in an account. What is the future value of her investment in 18 years if
the bank offers an annual percentage rate of 6.8%:
a. Compounded annually.
b. Compounded quarterly.
c. Compounded monthly.
d. Compounded continuously.
Why does the future value increase as the compounding periods shortens?