BEGIN MODE N 10 I 8 PMT 100 FV 0 PV 72469 Assume that you are offered an

# Begin mode n 10 i 8 pmt 100 fv 0 pv 72469 assume that

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BEGIN MODE N 10 I 8% PMT -\$100 FV \$0 PV \$724.69 Assume that you are offered an annuity that pays \$100 at the end of each year for 10 years. You could earn 8% on your money in other equally risky investments. What is the most you should pay for the annuity?
SECTION 4-11 SOLUTIONS TO SELF-TEST N 10 I 7% PV \$100,000 FV \$0 PMT -\$14,237.75 How would your answer change if you made withdrawals at the beginning of each year? BEGIN MODE N 10 I 7% PV \$100,000 FV \$0 PMT -\$13,306.31 I 7.0% PV \$100,000 PMT -\$10,000 FV \$0 N 17.8 How long would they last if you earned 0%? I 0.0% PV \$100,000 PMT -\$10,000 FV \$0 N 10.0 How long would they last if you earned the 7% but limited your withdrawals to \$7,000 per year? I 7.0% PV \$100,000 PMT -\$7,000 FV \$0 N #VALUE! N 12 PMT -\$12,000 PV \$100,000 FV \$0 I 6.11% BEGIN MODE N 10 PMT -\$10,000 PV \$60,000 FV \$0 I 13.70% If you think a “fair” rate of return would be 6%, how much should you ask for the annuity? BEGIN MODE N 10 I 6% PMT -\$10,000 FV \$0 PV \$78,016.92 Suppose you inherited \$100,000 and invested it at 7% per year. How large of a withdrawal could you make at the end of each of the next 10 years and end up with zero? If you had \$100,000 that was invested at 7% and you wanted to withdraw \$10,000 at the end of each year, how long would your funds last? * This result means that with \$7,000 withdrawals, you would never exhaust the funds. Your rich uncle named you as the beneficiary of his life insurance policy. The insurance company gives you a choice of \$100,000 today or a 12-year annuity of \$12,000 at the end of each year. What rate of return is the insurance company offering? Assume that you just inherited an annuity that will pay you \$10,000 per year for 10 years, with the first payment being made today. A friend of your mother offers to give you \$60,000 for the annuity. If you sell it to him, what rate of return will your mother’s friend earn on the investment?
SECTION 4-12 SOLUTIONS TO SELF-TEST Interest rate 6% Year 0 1 2 3 4 5 Ann Pmt \$0 \$100 \$100 \$100 \$100 \$100 Lump Sum \$500 Total CFs \$0 \$100 \$100 \$100 \$100 \$600 NPV \$794.87 Interest rate 6% Year 0 1 2 3 4 5 6 7 8 9 Ann Pmt \$0 \$100 \$100 \$100 \$100 \$100 \$100 \$100 \$100 \$100 Lump Sum Total CFs \$0 \$100 \$100 \$100 \$100 \$100 \$100 \$100 \$100 \$100 NPV \$1,015.21 Interest rate 8% Year 0 1 2 3 4 CFs \$0 \$100 \$200 \$0 \$400 NPV \$558.07 What is the present value of a 5-year ordinary annuity of \$100 plus an additional \$500 at the end of Year 5 if the interest rate is 6%? How would the PV change if the \$100 payments occurred in Years 1 through 10 and the \$500 came at the end of Year 10? What is the present value of the following uneven cash flow stream: \$0 at Time 0, \$100 at the end of Year 1 (or at Time 1), \$200 at the end of Year 2, \$0 at the end of Year 3, and \$400 at the end of Year 4, assuming the interest rate is 8%?
10 \$100 \$500 \$600
SECTION 4-13 SOLUTIONS TO SELF-TEST Interest rate 15% Year 0 1 2 3 CFs \$0 \$100 \$150 \$300 FV of CFs \$0.00 \$132.25 \$172.50 \$300.00 NFV \$604.75 What is the future value of this cash flow stream: \$100 at the end of 1 year, \$150 after 2 years, and \$300 after 3 years, assuming the appropriate interest rate is 15%?
SECTION 4-14 SOLUTIONS TO SELF-TEST Year 0 1 2 3 4 Ann Pmt -\$465 \$100 \$100 \$100 \$100 Lump Sum \$200 Total CFs -\$465 \$100 \$100 \$100 \$300 IRR 9.05% Year 0 1 2 3 CFs -\$465 \$100 \$200 \$300 IRR 11.71% An investment costs \$465 now and is expected to produce cash flows of \$100 at the end of each of the next 4 years, plus an extra lump sum payment of \$200 at the end of the 4th year. What is the expected rate of return on this investment?