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April 16, 2014

April 16, 2014

Posted by **SHALLY** on Wednesday, April 21, 2010 at 10:59pm.

- corporate finance -
**Ms. Sue**, Wednesday, April 21, 2010 at 11:08pmInterest rate on what? Is that figuring the interest rate you can get on $250,000 for five years?

This is an ambiguous question.

- corporate finance -
**SHALLY**, Thursday, April 22, 2010 at 2:26amI solved it by myself :) I t was a interest rate on 350,000 !!

The retirement plan will pay $250,000 immediately ‘OR’

Pays $350,000 after 5 years from the date of retirement with:

a) Interest rate (r)=0%

Then, the PV = FV/(1+r) n

= 350,000/(1+0) 5

=$350,000

So, getting $250,000 immediately is better than getting $350,000 after five years because money value today is always higher than the money value after the years.

b) Interest rate (r)=8%

Then, the PV = FV/(1+r) n

= 350,000/(1+0.08) 5

=$238,095

So, getting $250,000 immediately is better than getting $238,095 after five years as it is not worth waiting for 5 years to get lesser money. It shows that I am going to get $238,095 now which is not good than $250,000.

c) Interest rate (r)=20%

Then, the PV = FV/(1+r) n

= 350,000/(1+0.20) 5

=$140,675

So, getting $250,000 immediately is better than getting $350,000 after five years because the value of money I am getting today will be just $140,675 which is worse.

So, from all the options, the option of getting $250,000 immediately after retirement is better than the option of getting $350,000 after 5 years with different interest rates.

- corporate finance -
**Anonymous**, Sunday, January 23, 2011 at 4:49pmYou have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now.

a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?

b. What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it now?

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