![]() ![]() ![]() perpetuity Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. $285,714 A(n) _ is an annuity with an infinite life making continual annual payments. perpetuity The present value of a $20,000 perpetuity at a 7 percent discount rate is _. $178,571 An annuity with an infinite life is called a(n) _. The present value of a $25,000 perpetuity at a 14 percent discount rate is _. Finding present values and future values are simply reverse processes of one another, and that choosing between two lump sums based on PV will always give the same result as choosing between the same two lump sums based on FV Which of the following is true of annuities? An annuity due is an equal stream of cash flows is paid or received at the beginning of each period. Based on both present values and future values, B is the better choice. Using a discount rate of 5 percent, based on present values, which would you choose? Using the same discount rate of 5 percent, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.) The PV of X = $1,000,000 The PV of Y = $1,371,000 The FV of X = $1,276,000 The FV of Y = $1,500,000. Choice Y pays $1,750,000 at the end of five years from now. Congratulations! You have just won the lottery! However, the lottery bureau has just informed you that you can take your winnings in one of two ways. How much will their condo worth in 5 years if inflation is expected to be 8 percent? PV = $70,000, r = 8%, n = 5įV = 70,000(1.08)5 = $102,853. Since the condo is very small, they hope to move into a single-family house in 5 years. Dan and Jia are newlyweds and have just purchased a condominium for $70,000. Yes, Colin will have enough money to buy the scooter. Will Colin have enough money to buy the gift if he deposits his money in an account paying 8 percent compounded semiannually? n = 2, m = 2, r = 8%įV = 6,000(1+.08/2)2 × 2 = 6000(1.04)4 = $7,019 He would like to use this money to buy his mom Hayley a new scooter costing $7,000, two years from now. If the growth rate in sales is projected to be 10 percent over the next five years, what will the dollar amount of sales be in year five? FV = 1,000,000(1.1)5 = $1,610,510 Colin has inherited $6,000 from the death of Grandma Anna. The amount Aunt Tillie should invest today to receive $65,000 after 7 years, PV = 65,000 / (1.1)7 = $33,355.28 China Manufacturing Agents, Inc. She must find an account with a higher interest rate or deposit a larger sum today. If the goal of this deposit is to cover a future obligation of $65,000, what recommendation would you make to Aunt Tillie? FV = 33,000(1.1)7 = $64,308Īunt Tillie will only have $64,308 at the end of seven years under the stated arrangement. She plans to leave the funds in this account for seven years earning interest. PV = 89,000(1.14)-15 = $12,469 Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent annually. Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent. ![]()
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