Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do by answering the following questions.
Draw time lines for (a) a $100 lump sum cash flow at the end of Year 2 (b) an ordinary annuity of $100 per year for 3 years, and (c) an uneven cash flow stream of -$50, $100, $75, and $50 at the end of Years 0 through 3.
(1) What is the future value of an initial $100 after 3 years if it is invested in an account paying 10 percent annual interest?
(2) What is the present value of $100 to be received in 3 years if the appropriate interest rate is 10 percent?
We sometimes need to find how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20 percent per year, how long will it take sales to double?
If you want an investment to double in 3 years, what interest rate must it earn?
What is the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change it to the other type of annuity? (Draw the appropriate timeline).100 100 100 0