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Assigment 4 Key (Short Version)

Assigment 4 Key (Short Version) - Finance 300 Homework 4...

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Finance 300 Homework # 4 – Time Value of Money 1. Future Value of a Single Cash Flow or Lump Sum K-Fed needs your financial advice. He just got a \$100,000 divorce settlement and would like to invest it. You tell him that he should put his money into a Certificate of Deposit (CD) that pays 10% interest per year. Thus, How much should K-Fed obtain at the end of year 5? FV 5 = \$161,051 K-Fed should get \$161,051 at the end of year 5. 2. Present Value of a Single Cash Flow or Lump Sum Beavis is your best friend. He was recently offered an investment that would pay him \$2,000 at the end of year 4. The interest rate quoted was 9% per year. What should be the most Beavis should pay for this investment, in other words, what is the present value of this investment? PV 4 = = \$1,417.43 After you figured out the PV of this investment, Beavis tells you that the price of this investment is \$3,500. Do you recommend that he buys this investment? Explain (Note : you don’t need calculations here) No, this investment is only worth \$1,417.43 and this most anyone should pay for it. If you were to pay more than \$1,417.73 for this investment, you would be taking an inferior

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Assigment 4 Key (Short Version) - Finance 300 Homework 4...

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