Chapter 10 Solution

# 5 compounded monthly this price is the present value

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Unformatted text preview: n: PMT = \$90,000, n = 12(3) = 36, P/Y 12 ENTER 7. 5% (making C/Y = P/Y = 12) i = 12 = 0.625% 36 N 1 − ( 1 + i ) −n 90000 PMT PV = PMT 0 FV i CPT PV 1 − 1.00625 −36 Ans: –2,893,312.18 = \$90,000 0.00625 = \$2,893,312.18 The settlement amount is \$2,893,312.18. 33. Equivalent lump payment = PV of annual payments Given: PMT = \$2000/year; n = 5; j = 4.5% compounded annually. 1 − 1.045 −5 PV = \$2000 0.045 = \$8779.95 The equivalent lump payment is \$8779.95. Chapter 10: Ordinary Annuities: Future Value and Present Value 55 Exercise 10.3 (continued) 35. The offer having the higher current economic value is preferred. The present value of the five payments of \$2000 is PV = \$2000 + \$2000 1 − 1.03 −4 0.03 = \$9434.20 6 I/Y P/Y 2 ENTER (making C/Y = P/Y = 2) 4 N 2000 PMT 0 FV CPT PV Ans: –7434.20 Therefore, Mr. Lindberg’s offer is worth \$9500 − \$9434.20 = \$65.80 more in current dollars. 37. Consider a \$1000 purchase. It requires a \$100 down payment plus 12 monthly payments of \$900/12 = \$75. Flemmings should be willing to accept a cash amount equal to the present value of the payments discounted at the rate of return that Flemmings can earn on this money. The present value of the payments is 1 − (1 + i ) − n PMT PV = i −12 1 − 1.007 = \$75 0.007 = \$860.35 Cash price = \$100 + \$860.35 = \$960.35 This is a \$39.65 or 3.97% discount from the \$1000 list price. 56 8.4 I/Y P/Y 12 ENTER (making C/Y = P/Y = 12) 12 N 75 PMT 0 FV CPT PV Ans: –860.35 Business Mathematics in Canada, 7/e Exercise 10.3 (continued) 39. Let represent the normal monthly pension 7.5 I/Y payment P/Y 12 ENTER at age 60. The choice at age 55 is between: (making C/Y = P/Y = 12) (i) receiving 0.85PMT per month for 28 years, or 336 N (ii) waiting 5 years and then receiving PMT 0.85 PMT per month for 28 − 5 = 23 years. 0 FV The economic values of the two alternatives are CPT PV their Ans: –119.24 present values at age 55. For option (i), 1 − 1.00625 −336 = 119.24PMT PV = 0.85PMT 0.00625 For option (ii), the present value at age 60 of the12(23) = 276...
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