This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Chapter 5, Problem 2 To find the PVA, we use the equation: PVA = C ( {1 [1/(1 + r)] t } / r ) At a 6 percent interest rate: X@6%: PVA = $4,300{[1 (1/1.06) 9 ] / .06 } = $29,247.28 Y@6%: PVA = $6,100{[1 (1/1.06) 5 ] / .06 } = $25,695.42 And at a 22 percent interest rate: X@22%: PVA = $4,300{[1 (1/1.22) 9 ] / .22 } = $16,281.03 Y@22%: PVA = $6,100{[1 (1/1.22) 5 ] / .22 } = $17,468.20 Notice that the PV of Investment X has a greater PV at a 6 percent interest rate, but a lower PV at a 22 percent interest rate. The reason is that X has greater total cash flows. At a lower interest rate, the total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a higher interest rate, Y is more valuable since it has larger annual payments. At a higher interest rate, getting these payments early are more important since the cost of waiting (the interest rate) is so much greater. Another way is to use the calculator: Calculator setup: CLR TVM X: $4,300 PMT , 9 N , 6% I/Y , CPT PV> $29,247.28, 22% I/Y , CPT PV> $16,281.03 Y: $6,100 PMT , 5 N , 6% I/Y , CPT PV> $25,695.42, 22% I/Y , CPT PV> $17,468.20 Discount Rate X: C = $4,300 Y: C = $6,100 6% $29,247.28 $25,695.42 22% $16,281.03 $17,468.20 Chapter 5, Problem 4 To find the PVA, we use the equation: PVA = C ( {1 [1/(1 + r)] t } / r ) PVA@15 yrs: PVA = $8,500{[1 (1/1.09) 15 ] / .09} = $68,515.85 PVA@40 yrs: PVA = $8,500{[1 (1/1.09) 40 ] / .09} = $91,437.56 PVA@75 yrs: PVA = $8,500{[1 (1/1.09) 75 ] / .09} = $94,297.15 To find the PV of a perpetuity, we use the equation:...
View Full
Document
 Winter '11
 Debruinne
 Finance, Interest, Interest Rate

Click to edit the document details