Discount Rates

Question 1

  1. The cost of a new automobile is $10,000. If the interest rate is 5%, how much would you have to set aside now to provide this sum in five years?
  2. You have to pay $12,000 a year in school fees at the end of each of the next six years. If the interest rate is 8%, how much do you need to set aside today to cover these bills?
  3. You have invested $60,476 at 8%. After paying the above school fees, how much would remain at the end of the six years?


Consider the following two mutually exclusive projects:

  1. Calculate the NPV of each project for discount rates of 0%, 10%, and 20%.
  2. What is the approximate IRR for each project?
  3. In what circumstances should the company accept project A?
  4. Calculate the NPV of the incremental investment (B – A) for discount rates of 0%, 10%, and 20%. What can you conclude?

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