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# Quiz02Key - i Name (Printed) FIN 5405 Financial Management...

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i Name (Printed) FIN 5405 Financial Management OEM 2009 Program Quiz 2 - Solutions - Code A June 7,2008 Note: This quiz consists of 10 questions. All questions are worth 1.5 points. By turning in this quiz I am confirming that all work on this quiz is my own and that I have not received help from other individuals in answering the specific questions on this quiz. Student's Signature _ FIN 5405 - Quiz 2 Solutions - OEM 2009 Program - Code A Page 1

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» Score 1. Assume that you have just won the lottery. You have two payout options. First, you can agree to take 30 equal annual payments, with the first payment to be made today at Year 0 and the last payment to be made at Year 29. Alternatively, using an effective annual rate of 6.9 percent, the lottery is willing to convert the annual payments into an equivalent lump sum payment today of \$5,627,839.38. You have no immediate need for this money and plan to simply invest and hold the money until Year 40, and believe that you can earn an effective annual rate of 8.95 percent over each of the next 40 years. Looking at your possible ending values at Year 40, you should be able to determine that you will be better off taking the lump sum value today rather than taking the yearly cash flows. Given this information, determine the difference in dollar values at Year 40 between the two options. * A. B. C. D. E. \$26,854,504.94 \$27,933, 131.9~ \$29,011,758.92 \$30,090,385.91 \$31,169,012.90 Determine the Amount of the Annual Payments: Set Calculator to BEGIN of Period: N = 30; INR = 6.9; PV = -5,627,839.38; Solve for PMT = \$420,000.00 Determine Value of Lump Sum at Year 40: N = 40; INR = 8.95; PV = -5,627,839.38; Solve for FV = \$173,552,581.26 = V 40 Determine Value of Annual Cash Flow at Year 40: Set Calculator to BEGIN of Period: Find Value at Year 0 at 8.95%: N = 30; INR = 8.95; PMT = 420,000; Solve for PV = \$4,722,043.69 Now Convert to Value at Year 40: N = 40; INR = 8.95; PV = -4,722,043.69; Solve for FV = \$145,619,449.29 Alternatively, Set Calculator to END of Period FIN 5405 - Quiz 2 Solutions - OEM 2009 Program - Code A Page 2
Find Value at Year 29 at 8.95% N = 30; IIYR = 8.95; PMT = 420,000; FV = \$56,717,855.78 Now Convert to Value at Year 40:. N = 11; I/yr = 8.95; PV = -56,717,855.78; Solve for FV = \$145,619,449.32 Determine Difference: Difference = \$173,552,581.26 - \$145,619,449.29 = \$21.933:131.9J; 2. Assume that today is your 25 th birthday and that you have decided that you wish to retire at age 65. You have determined that if you make a deposit today in an investment account, and then make an equal deposit every 15 months (every 5 quarters) thereafter, that you will make a 33 rd and final deposit the day you turn 65. You believe that by taking on some risk, you can earn a nominal annual return of 10.44 percent, but where interest is compounded monthly. At age 65 (right after making your last deposit) you hope to take the money that you have saved and purchase a guaranteed annuity from an insurance company

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## This note was uploaded on 05/12/2010 for the course FIN 5405 taught by Professor Tapley during the Summer '08 term at University of Florida.

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Quiz02Key - i Name (Printed) FIN 5405 Financial Management...

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