7th Tutorial

1. You have invested $50,000 in an account that earns 14%, how much
will you have in your account after 20 years.
Answer:
FVn= PV × (1+i )N
= $50,000 × (1+14 %)20= $687,150

2. Paul has an opportunity to receive $10,000 three year from now. If he

can earn 7% on his investment, what is the most he should pay now
for this opportunity?
Answer:
PV= FV / (1+i )N
PV = $10,000 / (1+7 % )3 = $8,162.98

3. You won the lottery and the organizing committee offered three
options to receive your prize?

Option 1 Option 2 Option 3

Cash: $100,000 $200,000 Cash: $50,000
After 7 Years $70,000
After 3 Years

If your interest rate is 13%, which option will you choose?

Answer:

Option 1 Option 2 Option 3

Cash $50,000 & PV after 3

PV = 0 PV after 7 years years

PV = $200,000 / PV = $70,000 /
Cash $100,000 (1+13 %) =
7
(1+13 %) =
3

$85,012 $48,517
$50,000 + $48,5173
= $98,514
We Choose Option 1.

4. You plan to buy a villa at 6th of October district, the contractor offered
you two methods of payment:
Method 1: you will pay EGP 2,000,000 at the end of each year for the
next 6 years.
Method 2: you will pay EGP 8,000,000 in cash.
If the opportunity cost is 14%, which method of payment would you
choose?
Answer:
Method 1: We have to calculate the PV of annuity.

2,000,000
PV= ( 14 % )* (1- ¿1¿ ) = 7,777,335.03 EGP

Method 2: EGP 8,000,000 in Cash

We Choose Method 1
 5. You start saving $20,000 every year in an account that earns 15%,
how much will you have in your account after 10 years.
Answer:

10
[ ( 1+15 % ) −1 ]
FV= 20,000 * ( ) = 406,074.364 $
15 %

6. Suppose a firm has been offered an opportunity to receive the

following mixed stream of cash flows over the next 5 years. If the
firm must earn 10% on its investments, what is the most it should pay
for this opportunity?

Year 1: $ 3,000
Year 2: $ 5,000
Year 3: $ 4,000
Year 4: $ 3,000
Year 5: $ 2,000

Answer:
Year (n) Cash Flow PV calculation PV
PV = CF / (1 + r)1
1 $3,000 PV = 3,000 / (1 + $2727.27
10%)1

2 $5,000 PV = 5,000 / (1 + 10%)2 $4132.23

3 $4,000 PV = 4,000 / (1 + 10%)3 $3005.25
4 $3,000 PV = 3,000 / (1 + 10%)4 $2049.04
PV = 2,000 / (1 + 10%)5
5 $2,000 $1241.84
PV5 $13,155.63