Find the future value of your money

Assignment Help Financial Accounting

Reference no: EM133212619 , Length: Word count: 1000 Words

Assignment - Calculate the Internal Rate of Return Questions

Question 1 - You recently worked as consultant for an important company and received your payment of an amount of $15 000. You want to invest this money for 3 years, but you have the following three possibilities.

Option 1. You can invest your money in a financial institution that offers you a nominal interest rate of 8% compounded semi-annually.

Option 2. Your second possibility offers you an effective interest rate of 0.02% compounded daily.

Option 3. Your last option is to invest your money receiving a continuously compounded interest rate of 8%.

Choose the most convenient option from the point of view of the mathematics of finance. Consider a 365-day year.

Question 2 - From the theory of Mathematics of Finance, you know that the interest rate can be compounded more or less frequently. Suppose the principal of the previous question invested according to the best option of Question 1 for 3 years. Find the interest rate for each case in order to have all the options completely equivalent to the best investment.

Even more, find a simple interest rate that equals the above compounded cases...

Question 3 - Suppose you decided to invest the money you won in Question 1 () in a financial institution that offers you an interest rate of 4% compounded annually. You are going to invest it with the following rules:

The total period of investment must be 10 years.

You must take from your account 5% of the total amount every 2 years.

Find the final amount of money remaining in your account after taking the last 5% at the end of the 10th year.

Question 4 - Suppose a friend offered you to invest your $15 000 of the Question 1 in a 3-year project with the following (yearly) cash flow: $6 000, $6 500 and $5 000.Just find the Net Present Value and the Internal Rate of Return of the project considering a discount rate of 10%. The NPV value must be fully calculated (step by step), i.e., no calculator or excel results are allowed. Only IRR can be calculated using Excel.

Question 5 - Suppose you found another way to invest the money you won in Question 1 ($15 000): investing in another currency! You asked a financial consultant for an interest rate and also the exchange rate between dollars and Euros and the information you have is the following.

Exchange rate for today ("spot rate"): 1.05 $/€. That means, you receive today 1 € for each $1.05 or approximately 0.95 € for each $1.

Annually interest rate (in Euro) if you invest for a fixed term of 3 years: 8.5% (annually compounded).

Exchange rate for 3 years from now ("forward rate"): 1.2 $/€. That means you know in advance the currency exchange rate in 3 years, and you can fix it... sometimes this is an advantage because you can control the risk.

Find the future value of your money (in dollars) if you buy Euros today, invest for three years (in euros) and after this period of time you buy dollars again. Find also the equivalent interest rate in dollar currency.

Reference no: EM133212619

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