1) Calculating Interest Rates and Future Values.
A 1949 Vincent Black Shadow Series B vintage motorcycle (of which only 80 were made) sold for about $45,000 in 1996. If you were fortunate enough to have purchased one new for $630 in 1949, what return did you earn on your investment? If the value of a $20,000 1998 Bimota Supermono appreciates at the same rate, what will it be worth in another 47 years?
2) Amortization with Equal Payments.
Prepare an amortization schedule for a three-year loan of $40,000. The interest rate is 11 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? How much total interest is paid over the life of the loan?
3) Calculating NPV.
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 23 percent?
This solution looks at calculating rates of return, future values, NPV.