89%(9)8 out of 9 people found this document helpful
This preview shows page 74 - 80 out of 83 pages.
BEGIN MODEN10I8%PMT-$100FV$0PV$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 4-11SOLUTIONS TO SELF-TESTN10I7%PV$100,000FV$0PMT-$14,237.75How would your answer change if you made withdrawals at the beginning of each year?BEGIN MODEN10I7%PV$100,000FV$0PMT-$13,306.31I7.0%PV$100,000PMT-$10,000FV$0N17.8How long would they last if you earned 0%?I0.0%PV$100,000PMT-$10,000FV$0N10.0How long would they last if you earned the 7% but limited your withdrawals to $7,000 per year? I7.0%PV$100,000PMT-$7,000FV$0N#VALUE!N12PMT-$12,000PV$100,000FV$0I6.11%BEGIN MODEN10PMT-$10,000PV$60,000FV$0I13.70%If you think a “fair” rate of return would be 6%, how much should you ask for the annuity?BEGIN MODEN10I6%PMT-$10,000FV$0PV$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 4-12SOLUTIONS TO SELF-TESTInterest rate6%Year012345Ann Pmt$0$100$100$100$100$100Lump Sum$500Total CFs$0$100$100$100$100$600NPV$794.87Interest rate6%Year0123456789Ann Pmt$0$100$100$100$100$100$100$100$100$100Lump SumTotal CFs$0$100$100$100$100$100$100$100$100$100NPV$1,015.21Interest rate8%Year01234CFs$0$100$200$0$400NPV$558.07What 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%?
SECTION 4-13SOLUTIONS TO SELF-TESTInterest rate15%Year0123CFs$0$100$150$300FV of CFs$0.00$132.25$172.50$300.00NFV$604.75What 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 4-14SOLUTIONS TO SELF-TESTYear01234Ann Pmt-$465$100$100$100$100Lump Sum$200Total CFs-$465$100$100$100$300IRR9.05%Year0123CFs-$465$100$200$300IRR11.71%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?