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    Chapter 5 Finman

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    Gen Libertad
    The document contains several multi-step word problems involving calculating present and future values of cash flows with different interest rates and time periods. It provides the calculations and answers for each problem. The problems cover topics like calculating the interest rate needed for retirement savings to reach a goal amount, determining the number of years to reach a savings target with deposits and interest, and evaluating different cash prize options in a lottery based on their present values.

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    © All Rights Reserved
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    Chapter 5 Finman

    Uploaded by

    Gen Libertad
    700 views4 pages
    The document contains several multi-step word problems involving calculating present and future values of cash flows with different interest rates and time periods. It provides the calculations and answers for each problem. The problems cover topics like calculating the interest rate needed for retirement savings to reach a goal amount, determining the number of years to reach a savings target with deposits and interest, and evaluating different cash prize options in a lottery based on their present values.

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    The document contains several multi-step word problems involving calculating present and future values of cash flows with different interest rates and time periods. It provides the calculations and answers for each problem. The problems cover topics like calculating the interest rate needed for retirement savings to reach a goal amount, determining the number of years to reach a savings target with deposits and interest, and evaluating different cash prize options in a lottery based on their present values.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    700 views4 pages

    Chapter 5 Finman

    Uploaded by

    Gen Libertad
    The document contains several multi-step word problems involving calculating present and future values of cash flows with different interest rates and time periods. It provides the calculations and answers for each problem. The problems cover topics like calculating the interest rate needed for retirement savings to reach a goal amount, determining the number of years to reach a savings target with deposits and interest, and evaluating different cash prize options in a lottery based on their present values.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    5.3. Your parents will retire in 18 years.

    They currently have $250,000, and they think they will need
    $1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming
    they don’t save any additional funds?

    Answer:

    Amount in 18 years = 250000 *(1+r) ^ 18

    1000000 = 250000 *(1+r) ^ 18

    (1+r) ^ 18 = 4

    1+r = 1.08

    r = 1.08 – 1

    r = 0.08 or 8%

    5.5. You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the
    end of every future year until your account totals $250,000. You expect to earn 12% annually on the
    account. How many years will it take to reach your goal?

    Answer:

    FVA = 42180.53*(1+12%)^n + 5000*[(1+12%)^n-1]/12% = 250,000


    42180.53*1.12^n + 5000*(1.12^n - 1)/0.12 = 250,000
    42180.53*(1.12)^n + 41666.67*(1.12)^n - 41667.67 = 250,000
    83847.2*(1.12)^n = 250,000+41666.67 = 291666.67
    1.12^n = 291,666.67/83847.2 = 3.478
    n = 10.998 = 11 years

    5.13. Find the interest rates earned on each of the following:

    a. You borrow $700 and promise to pay back $749 at the end of 1 year
    PV = $700
    N=1
    FV = -$749
    PMT = 0
    I=?
    I = 7%
    b. You lend $700 and receive a promise to be paid $749 at the end of 1 year
    PV = -$700

    N=1
    FV = $749
    PMT = 0
    I = 7%

    c. You borrow $85,000 and promise to pay back $201,229 at the end of 10 years
    PV = $85,000
    N = 10
    FV = -$201,229
    PMT = 0
    I = 9%

    d. You borrow $9,000 and promise to make payments of $2,684.80 at the end of each the next 5
    years.
    PV = $9,000
    N=5
    FV = 0
    PMT = $2,684.80
    I = 15%

    5-17. What is the present value of a $100 perpetuity if the interest rate is 7%? IF interest rated
    doubled to 14%, what would its present value be?

    The present value of a perpetuity is forced by dividing the cash flow by the discount rate
    PV = $100 / O. O7 = $1,428.57

    At a discount rate of 14 percent the present value falls.


    PV = $100 / 0.14 = $714.29

    5-22 PV of a Cash Flow Stream. A rookie quarterback in negotiating his first NFL contract. His
    opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are
    guaranteed, and they would be made at the end of each year. Terms of each contract are as follows

    Contract 1: PV =$2,727,272.73 + $2,479,338.84 + $2,253,944.40 + $2,049,040.37 = $9,509,596.34

    Contract 2: PV = $1,818,181.82 + $2,479,338.84 + $3,005,259.20 + $3,415,067.28 = $10,717,847.14

    Contract 3: PV = $6,363,636.36 + $826,446.28 + $ 751,314.80 + $683,013.46 = $8,624,410.90


    Contract 2 gives the quarterbacks the highest present value, therefore, he should accept Contract 2.

    5-23.Wang Yun just won the lottery and she must choose among three award option. She can elect to
    receive a lump sum today of $61 million to receive 10 end-of-year payments of 9.5 million or to
    receive 30 end-of-year payments of 5.5 million.
    A.) 1. Receive a lump sum today of $61 million
    PV = $61,000,000 1/Y= 7% n= 0
    FV = PV (1 + r) t
    FV = $61,000,000 (1+0.07)0
    FV = $61,000,000

    2. Receive 10 end-of-year payments of 9.5 million


    PV = $9,500,000 1/Y = 7% n= 10
    FV = PV(1+ r) t
    FV = $9,500,000 (1 + 0.07)0
    FV = $18,693,464.47

    3. Receive 30 end-of-year payments of $5.5 million


    PV = $5,500,000 1/Y = 7% n = 30
    FV = PV(1 + r)t
    FV = $5,500,000 (1 + 0.07)0
    FV = $41,905,187.05

    Decision: In this case, It will be better for her to receive a lump sum today of $61 million since she will
    get the highest present value

    B.) If she expects to earn 8% annually, which is the best choice?

    1. Receive a lump sum today of $61 million


    PV = $61,000,000 1/Y = 8% n= 0
    FV = PV(1 + r)t
    FV = $61,000,000 (1 + 0.08)10
    FV = $61,000,000

    2. Receive 10 end-of-year payments of 9.5 million


    PV =$9,500,000 1/Y = 8% n=10
    FV = PV(1+ r)t
    FV = $9,500,000 (1+ 0.08) 10
    FV = $20,515,582.10
    3. Receive 30 end-of-year payments of $ 5.5 million.
    PV = $5,5000,000 1/Y=8% n= 30
    FV = PV(1 +r)t
    FV = $5,500,000 (1+0.08)30
    FV = $55,389,926.17
    Decision: In this case it will be better for her to receive a lump sum today of $61 million since she will get
    the highest present value.

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