Problem Set II
Problem P9 ? 17:
FV (Table 1) at 11% discount rate
2.00 x .901 = $1.80
2.20 x .802 = $1.79
2.40 x .731 = $1.75
33.00 x .731 = $24.12
--------
$29.46
Problem P9 - 22:
Alternative Present Values: Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; or $24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?
Solution:
(first alternative) Present value of 10,000 received now: 10,000
(second alternative) Present Value of annuity of 2,000 for eight years:
Appendix D
PVa=AxPVifa
=2,000xPVifa (11%,8years)
=2,000x5.146
=10,292
(third alternative) Present value of 24,000 received in 8 years
Appendix B
PV= FV x PVif
=24,000 x PVif(11%, 8 years)
I would select 24,000 to be received in 8 years
Revised answer based on 12%
First alternative present values of 10,000 received today 10,000
Second ? present value of annuity of 2,000 for 8 years (same as above but use 12)
Problem P9 ? 23
Payments Required: You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.
a. What single payment could be made at the beginning of the first year to achieve this objective?
Appendix b
PV=FV X PVif(8%, 10 periods)
= ...