How much would you pay for an investment that provides $1,000 at the end of the first year if your required rate of return is 10 percent? Now compute how much you would pay at 8 percent and 12 percent rates of return.

Solution: At 10%, an investor would be willing to pay $909.09.

N = 1

I = 10

PV = ?

PMT = 0

FV = 1,000

At 8%, an investor would be willing to pay $925.93…… Your grandmother gives you $10000 to be invested in one of three opportunities: real estate, bonds, or zero coupon bonds. If you invest the entire $10,000 in one of these opportunities with the expected cash flows shown below, which investment offers the highest NPV? Assume an 11 percent discount rate is appropriate for all three investments

	Year 1	Year 2	Year 3	Year 4	Year 5
Real Estate	$1,300	$1,300	$1,300	$1,300	$9,000
Bond	$1,000	$1,000	$1,000	$1,000	$11,000
Zero Coupon	$0	$0	$0	$0	$18,000

Solution: Entering the annual income stream and discount rate into the cash flow registers of our financial calcul…………… If you purchase a parcel of land today for $25,000 and you expect it to appreciate 10 percent per year in value, how much will your land be worth 10 years from now? Solution: At a 10% discount rate, the investment will be worth $64,843.56 in ten years.

N = 10

I = 10

PV = -25,000

PMT = 0

FV = ?

If you deposit $1 at the end of each of the next ten years and these deposits earn interest at 10 percent, what will the series of deposits be worth at the end of the 10^th year?

Solution: At a 10% discount rate, this series of payments, or annuity, will be worth $15.94 in ten years.]]>

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