Question

1) A company has purchased an asset for $196,819. If they require a return of 12.45%, how much must they sell the asset for in 8 years?(Round to 2 decimal places.)

2) In 1998, the average price of a gallon of gas was $1.06. Today, the average price of a gallon of gas is $2.73. At what annual rate has a gallon of gas increased over the last 20 years? (Answer as a percent. Enter only numbers and decimals in your response. Round to 2 decimal places.)

5) Calculate the value of the cash flows at time 7. The interest rate is 11.11%.

0 1 2

$1,047 $2,437    $3,340

what is the best way to work the above Questions?

Answer 1

1)

Future value = Present value (1 + r)^n

Future value = 196,819(1 + 0.1245)^8

Future value = 196,819 * 2.556676

Future value = $503,202.39

They must sell the asset for $503,202.39

2)

Annual rate = (Future value / initial value)^1/n - 1

Annual rate = (2.73 / 1.06)^1/20 - 1

Annual rate = (2.575472)^1/20 - 1

Annual rate = 1.0484 - 1

Annual rate = 0.0484 or 4.84%

3)

Future value of year 0 cash flow = 1047 (1 + 0.1111)^7 = 2,188.8637

Future value of year 1 cash flow = 2437 (1 + 0.1111)^6 = 4,585.3703

Future value of year 2 cash flow = 3340 (1 + 0.1111)^5 = 5,656.0365

Value of cash flow at time 7 = 2,188.8637 + 4,585.3703 + 5,656.0365

Value of cash flow for year 7 = $12,430.27