CH 6 Finance

# CH 6 Finance - 1 Homework Chapter 6 Discounted Cash Flows...

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Homework: Chapter 6 Discounted Cash Flows and Valuation VIII. Questions and Problems BASIC 6.1 Future value with multiple cash flows: Konerko, Inc., expects to earn cash flows of \$13,227, \$15,611, \$18,970, and \$19,114 over the next four years. If the company uses an 8 percent discount rate, what is the future value of these cash flows at the end of year 4? Solution: 0 8% 1 2 3 4 ├───────┼────────┼───────┼────────┤ \$13,227 \$15,611 \$18,970 \$19,114 6.2 Future value with multiple cash flows: Ben Woolmer has an investment that will pay him the following cash flows over the next five years: \$2,350, \$2,725, \$3,128, \$3,366, and \$3,695. If his investments typically earn 7.65 percent, what is the future value of the investment’s cash flows at the end of five years? 1 \$74,472.48 = + + + = + + + = 114 , 19 \$ 60 . 487 , 20 \$ 67 . 208 , 18 \$ 21 . 662 , 16 \$ 114 , 19 \$ ) 08 . 1 ( 970 , 18 \$ ) 08 . 1 ( 611 , 15 \$ ) 08 . 1 ( 227 , 13 \$ FV 1 2 3 4

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Solution: 0 7.65% 1 2 3 4 5 ├───────┼────────┼───────┼────────┼───────┤ \$2,350 \$2,725 \$3,128 \$3,366 \$3,695 \$17,498.75 = + + + + = + + + + = 695 , 3 \$ 50 . 623 , 3 \$ 89 . 624 , 3 \$ 45 . 399 , 3 \$ 91 . 155 , 3 \$ 695 , 3 \$ ) 0765 . 1 ( 366 , 3 \$ ) 0765 . 1 ( 128 , 3 \$ ) 0765 . 1 ( 725 , 2 \$ ) 0765 . 1 ( 350 , 2 \$ FV 1 2 3 4 5 6.3 Future value with multiple cash flows: You are a freshman in college and are planning a trip to Europe when you graduate from college at the end of four years. You plan to save the following amounts starting today: \$625, \$700, \$700, and \$750. If the account pays 5.75 percent annually, how much will you have at the end of four years? Solution: 0 5.75% 1 2 3 4 ├───────┼────────┼───────┼────────┤ \$625 \$700 \$700 \$750 \$3,185.40 = + + + = + + + = 13 . 793 81 . 782 \$ 83 . 827 \$ 63 . 781 \$ ) 0575 . 1 ( 750 \$ ) 0575 . 1 ( 700 \$ ) 0575 . 1 ( 700 \$ ) 0575 . 1 ( 625 \$ FV 2 3 4 4 6.4 Present value with multiple cash flows: Saul Cervantes has just purchased some equipment for his landscaping business. He plans to pay the following amounts at the end 2
of the next five years: \$10,450, \$8,500, \$9,675, \$12,500, and \$11,635. If he uses a discount rate of 10.875 percent, what is the cost of the equipment he purchased today? Solution: 0 10.875% 1 2 3 4 5 ├───────┼────────┼───────┼────────┼───────┤ \$10,450 \$8,500 \$9,675 \$12,500 \$11,635 \$38,652.76 = + + + + = + + + + = 82 . 943 , 6 \$ 33 . 271 , 8 23 . 098 , 7 \$ 35 . 914 , 6 \$ 03 . 425 , 9 \$ ) 10875 . 1 ( 635 , 11 \$ ) 10875 . 1 ( 500 , 12 \$ ) 10875 . 1 ( 675 , 9 \$ ) 10875 . 1 ( 500 , 8 \$ ) 10875 . 1 ( 450 , 10 \$ PV 5 4 3 2 6.5 Present value with multiple cash flows: Jeremy Fenloch borrowed from his friend a certain amount and promised to repay him the amounts of \$1,225, \$1,350, \$1,500, \$1,600, and \$1,600 over the next five years. If the friend normally discounts investments at 8 percent annually, how much did Jeremy borrow? Solution: 0 8% 1 2 3 4 5 ├───────┼────────┼───────┼────────┼───────┤ \$1,225 \$1,350 \$1,500 \$1,600 \$1,600 3

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\$5,747.40 = + + + + = + + + + = 93 . 088 , 1 \$ 05 . 176 , 1 \$ 75 . 190 , 1 \$ 41 . 157 , 1 \$ 26 . 134 , 1 \$ ) 08 . 1 ( 600 , 1 \$ ) 08 . 1 ( 600 , 1 \$ ) 08 . 1 ( 500 , 1 \$ ) 08 . 1 ( 350 , 1 \$ ) 08 . 1 ( 225 , 1 \$ PV 5 4 3 2 6.6 Present value with multiple cash flows: Biogenesis, Inc., expects the following cash flow stream over the next five years. The company discounts all cash flows at a 23 percent discount rate. What is the present value of this cash flow stream?
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