Midterm Questions 2

Midterm Questions 2 - 1) Finn Ants was awarded a Sauder...

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1) Finn Ants was awarded a Sauder Entrance Scholarship in his first year at UBC. He had the option of receiving four equal \$2,500 payments at the beginning of each year, OR one lump-sum payment halfway through his degree. If the discount rate is 4% per year, what is the value of Finn’s lump-sum payment? The wording of this questions was very similar to a past midterm, so if confused, remember to STATE ASSUMPTIONS. If you draw a timeline with \$2,500 at the beginning of four years, what they are asking is the value of those payments at the beginning of year three. The way the profs want you to calculate this is to do an annuity and compound it forward, but remember – the annuity is one period behind because the payments are at the beginning of the year. PV = \$2500*(1-1.04^-4)/.04 * 1.04^3 = \$10,207.85 Answer: \$9,815 (would have been for beginning of year 2) Correction! Answer: \$10,207.85 2) Finn will withdraw \$2,500 at the end of each year for the next three years from an account that pays interest at a rate of 5% per year, compounded semi-annually. The account balance will reduce to zero when the last withdrawal is made. How much interest

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This note was uploaded on 02/19/2011 for the course COMM 298 taught by Professor Freedman during the Spring '09 term at UBC.

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Midterm Questions 2 - 1) Finn Ants was awarded a Sauder...

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