Question

Question 1:

Sea Masters Co. has identified an investment project with the following cash flows for the next 5 years. If the discount rate is 6.7 percent, the present value of these cash flows is $__________. Round it to two decimal places without the $ sign, e.g., 23456.34

                        Year           Cash Flows
                          1              $21,000
                          2 35,000
                          3               44,000
4 53,000
                          5               77,000

Question 2:

The present value of the following cash flow stream is $6,561 when discounted at 12 percent annually. The value of the missing cash flow is $_______ . (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))

Year Cash Flow
1 $1,500
2 2,000
3 ?
4 2,500

Question 3:

Mary wants to retire in 36 years with $1 million in her retirement account. To that end she decides to save money every year in a savings plan that pays 9.4 percent annually. Her first contribution will occur at the end of the year (one year from today). She needs to save $__________ each year to the savings plan. Round it to two decimal places and do not include the $ sign, e.g., 1234.56.

Question 4:

Suppose an investment that pays $56,000 per year forever. If the required return on this investment is 10 percent, how much are you willing to pay for the investment today? (Do not include the dollar sign ($), and round your answer to two decimal places. (e.g., 123456.45)

Question 5:

Suppose you are going to receive $23,000 per year for 10 years at the end of each year; thus you receive the first payment one year from today. Compute the present value of the cash flows if the appropriate interest rate is 12 percent. Round it two decimal places, and do not include the $ sign, e.g., 123456.78.

Answer 1

Question 1:

This question would require the application of basic time value of money function: FV = PV * (1 + r)ⁿ

Now, for the series of cash flows:

PV = 19,681.35 + 30,742.50 + 36,220.92 + 40,890.10 + 55,676.08

PV = $183,210.95 ---> Answer

Question 2:

We will use the same time value of money function for this question as well:

6561 = 1,339.29 + 1,594.39 + CF₃ + 1,588.80

CF₃ = $2,038.50 ---> Answer

Question 3:

This requires application of FV of ordinary annuity, which is mathematically represented as:

P = $3,854.40 ---> Answer

Question 4:

This is an example of perpetuity.

PV of perpetuity = P/r = 56000/10% = $560,000 ---> Answer

Question 5:

PV of annuity is mathematically calculated as:

PV = $129,955.13 ---> Answer

answered by: anonymous