Case 1

Case 1

Discounted Cash Flow Analysis

Davis, Michaels, and Company

Question 2:

Now consider a 5-year CD. Rework parts a - d of question 1 using a 5-year ending date.

a. What is its value at maturity (future value) if it pays 10.0% interest?

N = 5

I = 10

PV = -10,000

PMT = 0

*FV = 16,105.10

b. FV at 5% and 15%

N = 5

I = 5

PV = -10,000

PMT = 0

*FV = 12,762.82

N = 5

I = 15

PV = -10,000

PMT = 0

*FV = 20,113.57

c. The First National Bank of San Francisco offers CDs with 10.0% nominal (stated) interest but compounded semiannually. What is the effective annual rate on such a CD? What would its future value be?

Nom = 10 [(1+i/n)^n] -1

C/Y = 10 [(1+10/2)^2] -1 = 10.25

CPT EFF = 10.25

N = 5

I = 10.25

PV = -10,000

PMT = 0

*FV = 16,489.38

d. Pacific Trust offer 10% CDs with daily compounding. What is the CD’s effective annual rate and its value at maturity?

Nom = 10 [(1+i/n)^n] -1

C/Y = 365 [(1+10/365)^365] -1 =10.516~10.52

CPT EFF =10.52

N = 5---- annual rate so only 5 years

I = 10.52

PV = -10,000

PMT = 0

*FV = 16,486.40

e. What nominal rate would First National Bank have to offer to make its semiannual CD competitive with Pacific’s daily CD? (this question was not part of Q2, but see if you can answer it.)

N =

*I =

PV =

PMT =

FV =

Question 3:

It is estimated that in 5 years the total cost for one year of college will be $20,000.

a. How much must be invested today in a CD paying 10.0% annual interest in order to accumulate the needed $20,000.

N = 5

I = 10

*PV = -12,418.43

PMT = 0

FV = 20,000

b. If only...