Extra Problems Chapter 5 - sum is equal to the PV of the...

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“Extra Problems” brought to you by your wonderful TA’s!!! 1. Lottery Question (similar to #4 on TVM worksheet from Wednesday’s class, listed under Content Module 6.2) Danielle wins the Florida Powerball Jackpot and decides to quit her job and move to a beautiful mansion in the Bahamas (where she can enjoy doing her favorite activity all day everyday: Finance problems!). She has to decide whether she should take a “lump sum” today or receive payments over the next 20 years. If she takes the “lump sum” today, she will receive $200 million. If she decides to take the payment, she will receive $17 million immediately (HINT HINT) and $17 million a year for the next 19 years. What discount rate does this option imply? Answer : Mode: BEG, P/Y: 1, N=20, I=?, PV= -200mil, FV= 0 (payments are over), PMT= 17Mil I=6.4636% - If Danielle takes the “lump sum” now instead of the 20 year annuity, she would need to be sure the lump
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Unformatted text preview: sum is equal to the PV of the annuity, at a “fair” discount rate. If Danielle sees the 6.4% as fair, she will take the Lump sum. 2. Similar to #5 on TVM worksheet UCF is planning on buying an additional parking lot, located across the street from campus. They are planning on making this lot all metered parking, and collecting the proceeds at the end of each year for 75 years. The yearly proceeds are expected to be $315,000. UCF is willing to pay $1.5 million up front for this parking lot. Note: since the revenues are predictable and not risky, use a discount rate of 7%. Is UCF getting a good or bad deal? What is UCF’s annual rate of return for each of the next 75 years? Answer: Mode: end, P/Y= 1, n=75, I= 7%, PMT= 315,000, PV= ? PV= $4,784,882 Good Deal! N= 75, PV= -1.5 mil, PMT= 315,000, I= ?, I= 26.58% this is the “I” you would be getting for the project....
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