ps4sol - Problem Set#4 Solutions 3 To solve this problem we...

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Problem Set #4 – Solutions 3. To solve this problem, we must find the FV of each cash flow and add them. To find the FV of a lump sum, we use: FV = PV(1 + r) t [email protected]% = $700(1.08) 3 + $950(1.08) 2 + $1,200(1.08) + $1,300 = $4,585.88 [email protected]% = $700(1.11) 3 + $950(1.11) 2 + $1,200(1.11) + $1,300 = $4,759.84 [email protected]% = $700(1.24) 3 + $950(1.24) 2 + $1,200(1.24) + $1,300 = $5,583.36 Notice we are finding the value at Year 4, the cash flow at Year 4 is simply added to the FV of the other cash flows. In other words, we do not need to compound this cash flow. 6. To find the PV, we use the equation: PV = C ({1 – [1/(1 + r) ] t } / r ) PV = $65,000{[1 – (1/1.085) 8 ] / .085} = $366,546.89 9. Here we have the PV, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PV equation: PV = C ({1 – [1/(1 + r) ] t } / r ) $30,000 = C {[1 – (1/1.08) 7 ] / .08} We can now solve this equation for the annuity payment. Doing so, we get: C = $30,000 / 5.20637 = $5,762.17
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ps4sol - Problem Set#4 Solutions 3 To solve this problem we...

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