your answer to 2 decimal places (e.g., 32.16).)Selected Answer: Correct Answer: •Question 14 4 out of 4 pointsGiven an interest rate of 7.15 percent per year, what is the value at year t= 8 of a

perpetual stream of $3,795 payments that begin at year t= 20? (Do not include the dollar sign ($). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)Selected Answer: Correct Answer: Response Feedback: •Question 15 4 out of 4 pointsCameron is going to receive an annuity for 42 years of $22,330, and Kennedy is going to receive a perpetuity of that same amount. If the appropriate discount rate is 7%, how much more are Kennedy's cash flows worth today than Cameron's cash flows? (Do not include the dollar sign ($). Enter rounded answer as

directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)Selected Answer: Correct Answer: Response Feedback: Solution A:The difference between Kennedy's and Cameron's cash flows is zero each year up to and including the year that Cameron's cash flows end. Then Kennedy's cash flows continue the next year into perpetuity. Discount the value of that perpetuity to present.For example, suppose the discount rate is 6%, and if the cash flows are $30,000 and Cameron's stop at year 42, then the difference is $0 through year 42 and $30,000 starting in year 43. The perpetuity formula calculates
the value one period before the first cash flow or in year 42:
V
42
= $30,000 / .06 = $500,000
Discount that back to present for 42 years.
V
0
= $500,000 / (1+.06)
Solution B:
Calculate how much Kennedy's perpetual cash flows are worth today, and
then subtract how much Cameron's annuity cash flows are worth today.
For example, suppose the discount rate is 6%, the cash flows are $30,000,
and Cameron's stop at year 42.
Today Kennedy's perpetual cash flows are worth
PVP = $30,000 / .06 = $500,000
Today Cameron's annuity cash flows are worth
PVA = $30,000 / .06 * [1 - 1/(1+.06)
And the difference is
PVP - PVA = $500,000 - $456,736 = $43,264
•
Question 16
12 out of 12 points
Suppose you are
going to receive
$25,000 per year for
10 year. The
appropriate interest
rate is 5%.
(a) What is the
present value of
these payments if
they are an ordinary
annuity?
[r]

(b) What is the
present value of
these payments if
they are an annuity
due?
[s]
(c) If you invest the
payments over these
10 years, what will
be their future value
if they are an
ordinary annuity?
[t]
(d) If you invest the
payments over these
10 years, what will
be their future value
if they are an
annuity due?
[u]
Selected
Answer:
Suppose you are going to receive $25,000 per year for 10 year. The
appropriate interest rate is 5%.
(a) What is the present value of these payments if they are an ordinary
annuity?
(b) What is the present value of these payments if they are an annuity
due?
(c) If you invest the payments over these 10 years, what will be their
future value if they are an ordinary annuity?

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- Fall '08
- BERG
- Finance, Time Value Of Money, Annual Percentage Rate, Net Present Value, Perpetuity, Mathematical finance