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?

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