Juan David Barbosa

Infrastructure Finance jbarbosa@masdar.ac.ae

August 6/2015

Chapter 2 - Spreadsheet Questions

2.1 In 1880 five aboriginal trackers were each promised the equivalent of 100
Australian dollars for helping to capture the notorious outlaw Ned Kelly. One
hundred and thirteen years later the granddaughters of two of the trackers claimed
that this reward had not been paid. If the interest rate over this period averaged
about 4.5%, how much would the A$100 have accumulated to? (Principles of
Corporate Finance, 10th)

FV =PV ( 1+r )

FV = $14,459.09
2.2 (PV) Your company can lease a truck for $10,000 a year (paid at the end of the
year) for six years, or it can buy the truck today for $50,000. At the end of the six
years the truck will be worth- less. If the interest rate is 6%, what is the present
value of the lease payments? Is the lease worthwhile? (Principles of Corporate
Finance, 10th)

PV =C

1
1

r r ( 1+r )n

The lease is better than buying the truck today because its PLV is below than
todays price (PTV).

2.3 (RATE) Ford Motor stock was one of the victims of the 2008 credit crisis. In June
2007, Ford stock price stood at $9.42. Eighteen months later it was $2.72. What was
the annual rate of return over this period to an investor in Ford stock? (Principles of
Corporate Finance, 10th)

FV =PV ( 1+r )n

r=

FV
1
PV

r=-71.13%
It is a negative rate because the investor actually lost money between 2007 and
2008.
2.4 (NPER) An investment adviser has promised to double your money. If the
interest rate is 7% a year, how many years will she take to do so? (Principles of
Corporate Finance, 10th)

FV =PV ( 1+r )n
2 P V =PV ( 1+r )
ln ( 2 )=n ln ( 1+r )
n=

ln ( 2 )
ln ( 1+r )

n=11 years
The time for doubling the money is independent of the amount of money and it will
be rounded to the next year.

2.5 (PMT) You need to take out a home mortgage for $200,000. If payments are
made annually over 30 years and the interest rate is 8%, what is the amount of the
annual payment? (Principles of Corporate Finance, 10th)

PV =C

1
1

r r ( 1+r )n

PV
=C
1
1

r r ( 1+r )n

C=$17,765.49
2.6 (XNPV) Your office building requires an initial cash outlay of $370,000. Suppose
that you plan to rent it out for three years at $20,000 a year and then sell it for
$400,000. If the cost of capital is 12%, what is its net present value? (Principles of
Corporate Finance, 10th)

PV 1 =C1

1
1

r r ( 1+r )n

PV 2=

FV
( 1+r )n

NPV =C0 + P V 1+ P V 2

NPV =$ 37,251.28
2.7 (EFFECT) First National Bank pays 6.2% interest compounded annually. Second
National Bank pays 6% interest compounded monthly. Which bank offers the higher
effective annual interest rate? (Principles of Corporate Finance, 10th)
m

( ( ))

r e = 1+

rn
m

Both banks pay almost the same annual effective rate, but after the second decimal
we see the first National Bank offers a better rate.
2.8 (NOMINAL) What monthly compounded interest rate would Second National
Bank need to pay on savings deposits to provide an effective rate of 6.2%
(Principles of Corporate Finance, 10th)

( ( ))

r
r e = 1+ n
m

r n=m ( m r e +11 )

The nominal annual rate to be offered is rn=6.03%

References:

Principles of Corporate Finance, 10th. McGraw-Hill Create. VitalBook file.