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001 - 5.3 1 ESTIONS AND-PROBLEMS{e Present Va'ihe and...

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Unformatted text preview: 5.3 1 ESTIONS AND-PROBLEMS {e Present Va'ihe and Multiple 3aws'h‘ Flows. Ab'u' Waterworks has identified an ' c it A P 'r E n -5 I Discounted Cash Flow Valuation 4 '...;Annu:ty Present Values. Tri— State Megabocks Lottery advertises a $10 million grand ptize The winner receives $500,000 today and 19 annual payments of 'i- $5.00, 00(1- Alump' sum option of $5 million payabie 1mmed1ately is also avaiiable. 3515' this deceptive advertislng? ~ - - . Annuity Present verges. . Suppose you Won the Tri- State Megabucks Lottery I '3, in the. preVious question. What factors should- you take into: account in deciding . Whether yen should take the annuity option or the lump Sum option? _ PrelSent Vaiue. If you Were an athlete negotiating a contract would you Want a big signing bonus payable immediately and Smaller payments in the future; 0r Vice verse? HoW about looking at it from the team? s perspective? PreSent value. Suppose two athletes Sign 10—year contracts for $80 million. In one case, "we he told that the $80 million Will be paid 111 10 equal installments.- In the other caSe, we’re. told that the $80 million Will be paid 111 10 installments ' but the 1nstaliments Will 1131cr'ease4 by 5 percent per. year. Who got the better deal? APR and EAR. Should lending. laws be changed to require i-enders to report EARS instead of APRS? Why or- why not? _ - Time Value. On subsuhzed Stafford loans, .a commOn source of financial aid for coliege students, interest does not begin to accrue until repayment begins Who- reCeiVes a bigger subsidy, a freshman or a senmr? EXplain Time Value. '_ In Words, hoW Would you go about Valuing the subsidy on a subsidized Stafford. loan? ' - _ . Time Vahle. Eligibility for a subsidized- Stafford loan is based :on current financial need; HQWeVer both subsidized and unsubsidized- Stafford loans are repaid out of future meme- GiVen this, do you see a4 poSsibl'e' objection to haVIIlg two types? ‘ ' ' * ‘ ' 189 select problems aresavailaple in McGraw—Hili Connect Piease see the. pack-aging options . secticn; of the préface for more information. investment project with the folloWing cash floWs. "If, the discount rate is 12 percent, what 1s the present Vaiue of. these cash flows? What 15 the present Value at 18 percent? At 24 percent? " - - - - S 950 730 1 .420 1 ,780 th—l Hose!“ Value andMuitipie Caishirflatvsi. Investment X offers 'to pay-you - - _ “,400 per year for 9yea14‘s, Whereas Investment Y offers to pay you $6,100 per . 3w for 5 years. Which of these cash flow streams has the higher present value if pi discount rate is 6 percent? If the discount rate is 22 percent? BaSic ' - - (Questions 1—28) ...
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