Author Question: The discount rate that should be used in the net present value calculation to compensate for risk is ... (Read 52 times)

Jkov05 · **on:** Jul 10, 2018

The discount rate that should be used in the net present value calculation to compensate for risk is ________. (See Table 11.7)

A) 6 percent
B) 15 percent
C) 18 percent
D) 24 percent

Question 2

Aunt Tillie has deposited 33,000 today in an account which will earn 10 percent annually. She plans to leave the funds in this account for seven years earning interest.

If the goal of this deposit is to cover a future obligation of 65,000, what recommendation would you make to Aunt Tillie?

aadams68 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

D

Answer to Question 2

FV = 33,000(1.1)7 = 64,308
Aunt Tillie will only have 64,308 at the end of seven years under the stated arrangement. She must find an account with a higher interest rate or deposit a larger sum today.
The amount Aunt Tillie should invest today to receive 65,000 after 7 years, PV = 65,000 / (1.1)7 = 33,355.28