Mr.Blochirtiscreatingacollegeinvestmentfundforhisdaughter.
Hewillputin$850
peryearforthenext15yearsandexpectstoearna8%annualrateofreturn.Howmuch
moneywillhisdaughterhavewhenshestartscollege?
MikeCarlsonwillreceive$10,000ayearfromtheendofthethirdyeartothe
endofthe12thyear(10payments).Thediscountrateis10%.Thepresentvalue
todayofthisdeferredannuityis:
SharonSmithwillreceive$1Min50years.Thediscountrateis14.Asanalternative,shecan
receive$2,000today.Whichshouldshechoose?
A.the$1Mdollarsin50years.
B.$2,000today.
C.sheshouldbeindifferent.
D.needmoreinformation.
23.Assumethatyourrequiredrateofreturnis12percentandyouaregiventhefollowingstreamofcashflows:
Year
CashFlow
$10,000
15,000
15,000
15,000
15,000
20,000
Ifpaymentsaremadeattheendofeachperiod,whatisthepresentvalueofthecashflowstream?
$66,909,b.$57,323,c.$61,815,d.$52,345,e.$62,029
24.SteaksGaloreneedstoarrangefinancingforitsexpansionprogram.One
bankofferstolendtherequired$1,000,000onaloanwhichrequiresinterestto
bepaidattheendofeachquarter.Thequotedrateis10percent,andtheprincipal
mustberepaidattheendoftheyear.Asecondlenderoffers9percent,daily
compounding(365dayyear),withinterestandprincipaldueattheendofthe
year.Whatisthedifferenceintheeffectiveannualrates(EFF%)chargedbythe
twobanks?
Youwanttoborrow$1,000fromafriendforoneyear,andyouproposetopay
her$1,120attheendoftheyear.Sheagreestolendyouthe$1,000,butshe
wantsyoutopayher$10ofinterestattheendofeachofthefirst11monthsplus
$1,010attheendofthe12thmonth.Howmuchhigheristheeffectiveannual
rateunderyourfriend'sproposalthanunderyourproposal?
Kenborrows$15,000fromabankat10percentannuallycompounded
interesttoberepaidinsixequalinstallments.Calculatetheinterestpaidin
thetwelfthyear.
Congratulations!Youhavejustwonthelottery!However,thelotterybureauhas
justinformedyouthatyoucantakeyourwinningsinoneoftwoways.ChoiceX
pays$1,750,000today.ChoiceYpays$1,000,000attheendoffiveyearsfrom
now.Whichwouldyouchooseandwhywouldyouchooseit?
Anemployeeandemployercontributeatotalof$3,000annuallyfor20yearstoa
retirementaccountthatearns9percentayear,howmuchwilltheemployeebeableto
withdrawfromtheaccountannuallyforthenext25years?
