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1- Present value of an ordinary annuity: Dynamics Telecommunications Corp. has made an investment

in another company that will guarantee it a cash flow of $22,500 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment?

2- Computing annuity payment: Kevin Winthrop is saving for an Australian vacation in three years. He estimates that he will need $5,000 to cover his airfare and all other expenses for a week-long holiday in Australia. If he can invest his money in an S&P 500 equity index fund that is expected to earn an average annual return of 10.3 percent over the next three years, how much will he have to save every year if he starts saving at the end of this year?

3- Perpetuity: Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments of $10,000 a year forever, starting when he retires. If he can earn 6.5 percent annually, how much does your grandfather need to invest to produce the desired cash flow?

4- Effective annual interest rate: Marshell Chavez bought a Honda Civic for $17,345. He put down $6,000 and financed the rest through the dealer at an APR of 4.9 percent for four years. What is the effective annual interest rate (EAR) if the loan payments are made monthly?

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Answer Present value of this investment = 75,423.49 He will have to save... View the full answer

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