Question

PLEASE SHOW THE STEP FOR CALCULATE? (1) Let us suppose that your company sales a subscription fee for a large printing 3-D device to a local hospital. The lease contract is for 5 years, and each year they will pay $5,500. Determine the annuity present value. Assume a 2.5% interest rate. (2) Let us suppose Foogle Inc. is entering the communication equipment domain. They wish to invest 10% above industry standard into R&D. Currently, "communication equipment" companies R&D about 11% of their sales. Let us suppose that the average sales of these companies are $300,000,000 per year. How much should Google invest? (3)Let us suppose that a treasury bill that is being sold for $1000, will buy it back from you for $1080 in two years. Determine the effective interest rate of this treasury bill.

Answer 1

1. Formula for Present value of Annuity = P * [ 1- (1 + r )^-n ] / r =

where P = Periodic Payment ($5,500)

r = rate of interest = 2.5% = 0.025

n= no. of years = 5

So, Present value of annuity =

$5,500 * [(1 - (1 + 0.025)^-5 ]/ 0.025 = $5,500 * 4.6458 = $25,551.90.

2. Amount of investment by Google = Average Investment as per Industry Standard * 1.10 = $300,000,000 * 11% * 1.10

=33,000,000 * 1.10 = $36,300,000

3. Effective interest Rate = (Maturity Value / Present Value)^(1/n) - 1 =

where, Maturity Value = $1,080

Present Value = $1,000

n = 2 years

Therefore, Effective interest rate =

(1,080 / 1,000)^(1/2) - 1 = 0.0392 = 3.92%