CHAPTER 6-4 - EAR = [1 + .3333]52 1 = 313,916,515.69% 23....

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EAR = [1 + .3333] 52 – 1 = 313,916,515.69% 23. Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash flows. Using the PV of a perpetuity equation: PV = C / r $95,000 = $1,800 / r We can now solve for the interest rate as follows: r = $1,800 / $95,000 = .0189 or 1.89% per month The interest rate is 1.89% per month. To find the APR, we multiply this rate by the number of months in a year, so: APR = (12)1.89% = 22.74% And using the equation to find an EAR: EAR = [1 + (APR / m )] m – 1 EAR = [1 + .0189] 12 – 1 = 25.26% 24. This problem requires us to find the FVA. The equation to find the FVA is: FVA = C {[(1 + r) t – 1] / r } FVA = $300[{[1 + (.10/12) ] 360 – 1} / (.10/12)] = $678,146.38 25. In the previous problem, the cash flows are monthly and the compounding period is monthly. This assumption still holds. Since the cash flows are annual, we need to use the EAR to calculate the future value of annual cash flows. It is important to remember that you have to make sure the compounding periods of the interest rate
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This note was uploaded on 07/15/2010 for the course FINANCE 318 taught by Professor Spurlin during the Spring '08 term at LA Tech.

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