FIN3300 Solution Ch6 (M 0628)

# FIN3300 Solution Ch6 (M 0628) - Solution Chapter 6...

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Solution Chapter 6: Discounted Cash Flow Valuation Page 179 Questions: 1, 3, 4, 5, 7, 10 1. To solve this problem, we must find the PV of each cash flow and add them. To find the PV of a lump sum, we use: PV = FV / (1 + r) t [email protected]% = \$950 / 1.10 + \$1,040 / 1.10 2 + \$1,130 / 1.10 3 + \$1,075 / 1.10 4 = \$3,306.37 [email protected]% = \$950 / 1.18 + \$1,040 / 1.18 2 + \$1,130 / 1.18 3 + \$1,075 / 1.18 4 = \$2,794.22 [email protected]% = \$950 / 1.24 + \$1,040 / 1.24 2 + \$1,130 / 1.24 3 + \$1,075 / 1.24 4 = \$2,489.88 3. To solve this problem, we must find the FV of each cash flow and add them. To find the FV of a lump sum, we use: FV = PV(1 + r) t [email protected]% = \$940(1.08) 3 + \$1,090(1.08) 2 + \$1,340(1.08) + \$1,405 = \$5,307.71 = \$940(1.11) 3 + \$1,090(1.11) 2 + \$1,340(1.11) + \$1,405 = \$5,520.96 = \$940(1.24) 3 + \$1,090(1.24) 2 + \$1,340(1.24) + \$1,405 = \$6,534.81 Notice we are finding the value at Year 4, the cash flow at Year 4 is simply added to the FV of the other cash flows. In other words, we do not need to compound this cash flow. 4. To find the PVA, we use the equation: PVA = C ({1 – [1/(1 + r) ] t } / r ) PVA = \$5,300{[1 – (1/1.07) 15 ] / .07} = \$48,271.94 PVA = \$5,300{[1 – (1/1.07) 40 ] / .07} = \$70,658.06 PVA = \$5,300{[1 – (1/1.07) 75 ] / .07} = \$75,240.70 To find the PV of a perpetuity, we use the equation:

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