$670.43.
5.
A real estate investment has the following expected cash flows:
Year
Cash Flows
1
$10,000
2
25,000
3
50,000
4
35,000
The discount rate is 8 percent. What is the investment’s present value?
a.
$103,799
b.
$ 96,110
*
c.
$ 95,353
d.
$120,000
PV = $10,000/1.08 + $25,000/(1.08)
2
+ $50,000/(1.08)
3
+ $35,000/(1.08)
4
= $9,259.26 + $21,433.47 + $39,691.61 + $25,726.04
= $96,110.38
≈
$96,110.
6.
If $100 is placed in an account that earns a nominal 4 percent, compounded
quarterly, what will it be worth in 5 years?
Financial calculator solution:
Inputs:
N = 20; I = 1; PV = -100; PMT = 0.
Output:
FV =
$122.02.
7.
In 1958 the average tuition for one year at an Ivy League school was $1,800.
Thirty years later, in 1988, the average cost was $13,700.
What was the growth rate in tuition over the 30-year period?
Financial calculator solution:
Inputs:
N = 30; PV = -1800; PMT = 0; FV = 13700.
Output:
I =
7.0%.
8.
At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half
in 8.04 years.
How long to the nearest year would it take the purchasing power of
$1 to be cut in half if the inflation rate were only 4 percent?
2