Finance Ch 6 HW

You are comparing two annuities with equal present values. The applicable discount rate is 7.25 percent. One annuity pays $2,500 on the first day of each year for 15 years. How much does the second annuity pay each year for 15 years if it pays at the end of each year?

2681.25

An ordinary annuity is best defined by which one of the following?

Equal payments paid at the end of regular intervals over a stated time period.

What is the future value of $1,400 a year for 35 years at 6 percent interest? Assume annual compounding.

$156,009

Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

$28,216

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

$398,148

Waldo expects to receive the following payments: year 1 = $50,000; year 2 = $28,000; year 3 = $12,000. All of this money will be saved for his retirement. If he can earn an average annual return of 10.5 percent, how much will he have in his account 25 years after making the first deposit?

$935,334

You have just purchased a new warehouse. To finance the purchase, you arranged for a 30-year mortgage loan for 65 percent of the $2.5 million purchase price. The monthly payment on this loan will be $10,400. What is the effective annual rate on this loan?

6.82 percent

You want to borrow $38,400 and can afford monthly payments of $960 for 48 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford?

9.24 percent

You are scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

PVannuity = C/r (1 - 1/(1+r)^t) 3600/.08 (1 - 1/(1+.08)^12) = 27,129.88 27,129.88 x (1+r) 27,129.88 x (1.08) = 29,300.27 29,300.27 - 27,129.88 = 2,170.39

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.