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Unformatted text preview: FNAN 301 Solutions to lab problems – 2/04/2011 Group lab problem Five years ago, Lincoln invested $2,500. Today, his investment is worth $4,500. If Lincoln earns the same annual rate of return in the future as the annual rate implied from the past and present values of his investment, then how much will Lincoln’s investment be worth in 9 years from today? To solve: 1) Find the implied return over the past 5 years 2) Use the implied return to find the future value in 9 years 1) Find the implied return over the past 5 years Time54321 Retime 1 2 3 4 5 Invest 2,500 Future value 4,500 Mode is not relevant, since PMT = 0 Enter 52,500 4,500 N I% PV PMT FV Solve for 12.475 2) Use the implied return to find the future value in 9 years Time 1 2 3 4 5 6 7 8 9 Investment $4,500 Future value ? FV t = C × (1+r) t C = 4,500 r = 12.475% = .12475 t = 9 FV 9 = 4,500 × (1.12475) 9 = 12,963 Mode is not relevant, since PMT = 0 Enter 9 12.4754,500 N I% PV PMT FV Solve for 12,963 Lincoln would have $12,963 in 9 years (Solutions may differ somewhat due to rounding annual rate of return) 1 FNAN 301 Solutions to lab problems – 2/04/2011 Group lab problem (part a is from Fall 2010, quiz 1, question 8, version 3) Arielle bought a new jet ski today from Wally’s Watersports Emporium. She will pay $300 today to Wally’s, she will receive a rebate of $300 from Wally’s in 1 year from today, and she will pay $1,600 to Wally’s in 3 years from today. a. If the discount rate is 9.6 percent, then what is the present value of the cash flows associated with this transaction? Note: the correct answer is less than zero. b. Should Arielle choose the plan described above or should she prefer to pay $1,500 in 2 years? Assume the discount rate is 9.6 percent for both alternatives....
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This note was uploaded on 02/16/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.
 Spring '09
 MURRAY

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