# Finance: Net Present Value and Rate Assignment

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Suppose you know that your will need \$2500 tow years from now in order to make a down payment on a car. A. Bank One is offering 4% interest (compounded annually) for two-year accounts and Bank Two is offering 4. 5% (compounded annually) for two-year accounts. If you know you need \$2500 two years from today, how much will you need to invest in Bank One to reach your goal? Alternatively, how much will you need to invest in Bank Two? Which bank account do you prefer? B. Now suppose you do not need the money for three years. How such will you need to deposit today in Bank One? Bank Two? 19.

Lucky Lynn has a choice between receiving \$1000 from her great uncle one year from today or \$900 from her great aunt today. She believes she could invest the \$900 at a one-year return of 12%. A. What is the future value of the gift from her great uncle upon receipt? From her great aunt? B. Which gift should she choose? C. How does your answer change if you believed she could invest the \$900 from her great aunt at only 10%? At what rate is she indifferent? 20. As manager of short- term projects, you are trying to decide whether or not to invest in a short-term reject that pays one cash flow of \$1000 one year from today.

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The total cost of the project is \$950. Your alternative investment is to deposit the money in a one-year bank certificate of deposit, which will pay 4% compounded annually. A. Assuming the cash flow of \$1000 is guaranteed (there is no risk you will not receive it), what would be a logical discount rate to use to determine the present value of the cash flows of the project? B. What is the present value of the project if you discount the you invest in the project? C. What would you do if the bank increases its quoted rate on one-year CDC to 5. 5%? D.