Assignment4solutions

Assignment4solutions - Procedure 1.

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Procedure 1. Draw a timeline for (1) a $100 lump sum cash flow at the end of year 2, (2) an ordinary annuity of  $100 per year for 3 years and (3) an uneven cash flow stream of -$50, $100, $275, and $50 at the  end of years 0 through 3. 2. Calculate the following: a.  Future value of an initial $100 after 3 years assuming annual interest of 10%. b.  Present value of $100 to be received in 3 years if the discount rate is 10%. 3. If a company’s sales are growing at a rate of 20% per year, how long will it take for  the sale to  double? 4. In order for an investment to double in 3 years, what interest rate must it earn? 5. Using a timeline, show examples of an ordinary annuity and an annuity due. 6. Calculate the future value of a 3-year ordinary annuity of $100 if the interest rate is 10%. 7. Calculate the present value of a 3-year ordinary annuity of $100 if the discount rate is 10%. 8. Redo calculations for steps 6 and 7 assuming an annuity is due. 9. Calculate the present value of an uneven cash flow stream of $100 at the end of year 1, $300 at  the end of year 2, $300 at the end of year 3, -$50 at the end of year 4 assuming a discount rate of  10%. 10. Calculate the future value of $100 after 5 years under 12% annual compounding,  semiannual  compounding, quarterly compounding, and monthly compounding. 11. Calculate the effective rate of interest for a nominal rate of 12% compounded semiannually,  quarterly, and monthly. 12. Will the effective rate ever equal the nominal rate? Explain your answer.
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BBA307 Assignment 4.1 Solutions 1. Draw a timeline for (1) a $100 lump sum cash flow at the end of year 2, (2) an ordinary annuity of $100 per year for 3 years and (3) an uneven cash flow stream of -$50, $100, $75, and $50 at the end of years 0 through 3. Solution A time line is a graphical representation which is used to show the timing of cash flows. The tick marks represent end of periods (often years), so time 0 is today; time 1 is the end of the first year, or 1 year from today; and so on. 0 1 2 year | | | lump sum 100 cash flow 0 1 2 3 | | | | annuity 100 100 100 0 1 2 3 | | | | uneven cash flow stream -50 100 75 50 A lump sum is a single flow; for example, a $100 inflow in year 2, as shown in the top time line. An annuity is a series of equal cash flows occurring over equal intervals, as illustrated in the middle time line. An uneven cash flow stream is an irregular series of cash flows which do not constitute an annuity, as in the lower time line. -50 represents a cash outflow rather than a receipt or inflow.
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Assignment4solutions - Procedure 1.

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