tvmcom06SOL - 1 Business Honors Finance Boot Camp TVM...

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Business Honors Finance Boot Camp TVM Competition Problems Solutions 1. Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sothebys sold the Edgar Degas bronze sculpture Petite Danseuse de Quartorze Ans at auction for a price of $10,311,500. Unfortunately for the previous owner, he had purchased it in 1999 at a price of$12,377,500.What was his annual rate of return on this sculpture? N = 4, PV = -12,377,500, FV =10,311,500, SOLVE I = -4.463 2. Investment X offers to pay you $4,000 per year for nine years, whereas Investment Y offers to pay you $6,000 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 22 percent? Investment X: PMT = 4000, N = 9, I = 5, SOLVE PV= 28,431.28 PMT = 4000, N = 9, I = 22, SOLVE PV= 15,145.14 Investment Y: PMT = 6000, N = 5, I = 5, SOLVE PV= 25,976.86 PMT = 6000, N = 5, I = 22, SOLVE PV= 17,181.38 3. The Perpetual Life insurance Co. is trying to sell you an investment policy that will pay you and your heirs $15,000 per year forever. If the required return on this investment is 8 percent how much will you pay for the policy? Suppose the Perpetual Life Insurance Co. told you the policy costs $195,000, At what interest rate would this be a fair deal? 15,000/.08 = 187,500 15,000/I = 195,000, SOLVE I = 7.6923 4. You’re trying to choose between two different investments, both of which have up- front costs of $50,000. Investment G returns $85,000 in five years. Investment H returns $175,000 in 11 years. Which of these investments has the higher return? Investment G: PV = -50,000, FV = 85,000, N=5,
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tvmcom06SOL - 1 Business Honors Finance Boot Camp TVM...

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