Introduction to Finance

25. 
Challenge Problem
[Note: A computer spreadsheet software pro-
gram or a fi nancial calculator that can handle uneven cash fl ow streams 
will be needed to solve the following problems.] The following cash 
fl ow streams are expected to result from three investment opportunities.
Year
Investment 
Stable
Investment 
Declining
Investment 
Growing
1
$20,000
$35,000
$10,000
2
20,000
30,000
15,000
3
20,000
20,000
20,000
4
20,000
5,000
30,000
5
20,000
0
50,000
a. 
Find the present values at the end of time period zero for each 
of these three investments if the discount rate is 15 percent. Also, 
fi nd the present values for each investment using 10 percent and 20 
percent discount rates.
b. 
Find the future values of these three investments at the end of 
year fi ve if the compound interest rate is 12.5 percent. Also, fi nd 
the future values for each investment using 2.5 percent and 22.5 
percent compound rates.
c. 
Find the present values of the three investments using a 15 per-
cent annual discount rate but with quarterly discounting. Also, fi nd 
the present values for both semi-annual and monthly discounting 
for a 15 percent stated annual rate.
d. 
Find the future values of the three investments using a 12.5 
percent annual compound rate but with quarterly compounding. 
Also fi nd the future values for both semi-annual and monthly com-
pounding for a 12.5 percent stated annual rate.
e. 
Assume that the present value for each of the three investments 
is $75,000. What is the annual interest rate (%i) for each invest-
ment?
f. 
Show how your answers would change in (e) if quarterly dis-
counting takes place.
g. 
Assume that the future value for each of the three investments is 
$150,000. What is the annual interest rate (%i) for each investment? 
[Note: (e) and (g) are independent of each other.]
h. 
Show how your answers would change in (g) if quarterly com-
pounding takes place.

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