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Evaluating the 1958 Cadillac Offer

The document discusses various financial scenarios involving cash flow, present value, future value, and cost-benefit analysis. It includes examples of rental payments, investment options, and the implications of discount rates and compound interest. Additionally, it presents a decision-making scenario regarding the purchase of a classic car versus a new vehicle.

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Smily Isha
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3 views2 pages

Evaluating the 1958 Cadillac Offer

The document discusses various financial scenarios involving cash flow, present value, future value, and cost-benefit analysis. It includes examples of rental payments, investment options, and the implications of discount rates and compound interest. Additionally, it presents a decision-making scenario regarding the purchase of a classic car versus a new vehicle.

Uploaded by

Smily Isha
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

1.

Cash Flow
A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement
that states that she will pay $25,000 every six months for the next five years. Which of the
following is the timeline for her rental payments, assuming she makes the first payment
immediately?
A)
Date(years) 0 1 2 3 4 5
Cash Flows(thousands) -$50 -$50 -$50 -$50 -$50 -$50
B)

Date(years) 0 1 2 3 4 5

Cash Flows(thousands) $50 $50 $50 $50 $50 $50


C)
Date
(years) 0 1 2 3 4 5 6 3 1/2 4 4 1/2 5
Cash Flows
(thousands) $25 $25 $25 $25 $25 $25 $25 $25 $25 $25 $25
D)
Date
(years) 0 1/2 1 1 1/2 2 2 1/2 3 3 1/2 4 4 1/2 5
Cash Flows
(thousands) -$25 -$25 -$25 -$25 -$25 -$25 -$25 -$25 -$25 -$25 0

2. Valuing Cash Flows at Different Points in Time (Present Value vs Future Value)

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today
or ________.
A) $462.96 in one year
B) $500.00 in one year
C) $540.00 in one year
D) None of the above

3. Valuing Cash Flows at Different Points in Time (Present Value vs Future Value)

Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest
rate is 7% per year, which option is preferable?

4. Valuing Cash Flows at Different Points in Time (Present Value vs Future Value)

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of
the following opportunities is the best, given that the interest rate is 4% per year?
A) one that pays $900 now
B) one that pays $1080 in two years
C) one that pays $1350 in five years
D) one that pays $1620 in ten years

5. What is a discount rate?

6. What is compound interest?

7. If $17,000 is invested at 10% per year, in approximately how many years will the
investment double? (Challenge)
A) 7.3 years
B) 8.4 years
C) 11.0 years
D) 14.6 years

8. Cost-Benefit Analysis
An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note
that very similar cars are selling on the open market for $87,000. You don't care for classic cars
and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the
Cadillac?
A) $87,000, since the Cadillac could be sold for this price.
B) $52,000, since the Cadillac could be bought for this price.
C) $35,000, since this is the difference between purchase and resale price of the Cadillac.
D) $35,000, since this is the value of the car that you really want to buy.

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