# CH08b HW – More Time Value

I don’t know how to handle this Business question and need guidance.

Important General Instructions for Reporting Numerical Answers:

– Do not round intermediate calculations.

– Report numerical answers to 2 decimal places.

– Unless otherwise instructed, solve problems in the given units. IE: if given units are in \$K, complete your computations in these units and, as applicable, report your answer in these units (without writing “\$” or “K”).

– Do not report any numerical answer as a percent. IE: for example, write

– Report negative numbers with a leading minus sign, like this (for example):

-23.451

Not like this: (23.451).

– Note that Canvas removes trailing insignificant figures. If you type, for example, 41.350, Canvas will remove the last decimal place and record your answer as 41.35 This is fine because 41.35 = 41.350.

– Assume time is measured in years unless otherwise stated.

Q1:

McCann Co. has identified an investment project with the following cash flows.

 Year Cash Flow 1 \$ 530 2 690 3 875 4 1,090

If the discount rate (r) is 10 percent, what is the present value of these cash flows?

Q2:

McCann Co. has identified an investment project with the following cash flows.

 Year Cash Flow 1 \$ 530 2 690 3 875 4 1,090

What is the total present value of these cash flows at 18 percent? (IE: r = 18%).

Q3:

Investment X offers to pay you \$X per year for eight years, starting one year from now, in return for your investment today of \$27,145.49. What is X if the interest rate for this project (r) is 5 percent?

Q4:

Velocity Investors offers a 6% annuity (r = 6%) paying \$4,350 per year for 15 years, starting one year from now.

If you have just \$43,000 available today to purchase this annuity contract, can you afford it? Choose yes or no and provide one reason for your choice.

A. Because the interest rate is not consistent with the uniform payments.
B. Because the asking price of the annuity is less than the amount you have available.
C. Because the uniform annuity payments are too large.
D. Because the interest rate is not consistent with the asking price.
E. Yes
F. Because the asking price of the annuity is more than the amount you have available.
G. No
H. Because the uniform annuity payments are too small.

Q5:

An investment offers \$4,350 per year forever, with the first payment occurring one year from now. If you like this investment contract but need to earn at least r of 6% on it, what is the most that you would pay for it?

Q6:

If you put up \$41,000 today in exchange for a 5.1 percent, 15-year annuity, what will your annual annuity payments be?

Q7:

Your company will generate \$47,000 in annual revenue each year for the next seven years from a new information database. Each blob of \$47,000 arrives at EOY. If the appropriate interest rate is 7.1 percent, what is the present value of the revenue?

Q8:

Prescott Bank offers you a five-year loan for \$75,000 at an annual interest rate of 6.8 percent. What will your annual loan payment be?

Q9:

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs \$35,000 per year forever. If you require a return on this investment of 4.7 percent, how much will you pay for the policy?

Q10:

SuperInvestor requires all her investments to grow at an r of at least 7.17 percent per year. She is offered a contract that will produce the cash flows shown below, in return for her payment of \$8,000 today (at T=0).

Assuming there is no possibility of bankruptcy or etc, should she make this investment?

 EOY Cash Flow 1 \$ 2,480 2 0 3 3,920 4 2,170

A. Yes

B. No

Q11:

Medical Lessors, Inc (MLI) buys an x-ray machine for \$200K. On the same day (EOY 0), the firm leases the machine to Radiology, Inc. (RI) for six years, via a six-year, uniform-payment, annuity-due contract with 10% interest. Payments are made annually.

Is this a correct Cash Flow Diagram for MLI? (“Correct” does not require the numerical value of cash flows shown as “CF”).

A. yes

B. No

Q12:

Medical Lessors, Inc (MLI) buys an x-ray machine for \$200K. On the same day (EOY 0), the firm leases the machine to Radiology, Inc. (RI) for six years, via a six-year, uniform-payment, annuity-due contract with 10% interest. Payments are made annually. What is the amount of the uniform payment?

Q13:

The present value of the following cash flow stream is \$7,500 when discounted at 9 percent annually. What is the value of the missing cash flow? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 Year Cash Flow 1 \$1,700 2 _______ 3 2,450 4 2,980

Q14:

Suppose you purchase a 5-year, 6.8% annuity with annual payouts of \$13,500.

How much do you pay for this contract?

Q15:

Suppose you are going to receive five annual payments of \$13,500. The appropriate interest rate is 6.8 percent. What is the present value if the payments are an annuity due?

Q16:

An investment offers \$4,350 per year for forever, with the first payment occurring one year from now.

What is the best way to describe this investment?

A. A perpetual annuity due
B. An annuity due
C. A perpetuity
D. A growing perpetuity
E. An annuity
F. A growing annuity due
G. A growing annuity
H. A perpetual sovereign bond

Q17:

A project has these cash flows

PVtot 1,000

CF1 500 at T = 1 year

CF2 600 at T = 3 years

Write an algebraic equation to use as a start-point for finding the r of this project.

A. 1,000 = (500 + 600) / (1+r)^3
B. 0 = 1,000 + (500 + 600) / (1+r)^3
C. 1,000 = (500 + 600) / (1+r)^2
D. 1,000 = 500/(1+r) + 600/(1+r)^2
E. 1,000 = 500/(1+r) + 600/(1+r)^3