02 Jan 4. Calculating Annuity
Week 2 homework
Exercises E10-5, E10-6, E10-7, and E10-26.
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Week 2 – Homework
Michael R. Trujillo
Chapter 4
8. Calculating Rates of Return. In 2011, an 1880-O Morgan silver dollar sold for $13,113. What was the rate of return on this investment?
17. Calculating Present Values. Suppose you are still committed to owning a $150,000 Ferrari (see Question 9). If you believe your mutual fund can achieve a 10.25 percent annual rate of return, and you want to buy the car in 10 years on the day you turn 30, how much must you invest today?
18. Calculating Future Values. You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 10.1 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this suggest an investment strategy?)
Chapter 5
1. Present Value and Multiple Cash Flows. Rooster Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent?
Present Value – 10%
Year 1 – $830 $830/1.10 = $754.54
Year 2 – $610 $610/1.10^2 = $504.13
Year 3 – $1,140 $1,140/1.10^3 = $856.50
Year 4 – $1,390 $1,390/1.10^4 = $949.39
Present Value – 18%
Year 1 – $830 $830/1.18 = $703.39
Year 2 – $610 $610/1.18^2 = $438.09
Year 3 – $1,140 $1,140/1.18^3 = $693.84
Year 4 – $1,390 $1,390/1.18^4 = $716.95
Present Value – 24%
Year 1 – $830 $830/1.24 = $669.35
Year 2 – $610 $610/1.24^2 = $396.72
Year 3 – $1,140 $1,140/1.24^3 = $597.92
Year 4 – $1,390 $1,390/1.24^4 = $587.93
4. Calculating Annuity Present Values. An investment offers $6,700 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?
12. Calculating EAR. Find the EAR in each of the following cases:
APR Compounding Formula
10% Quarters (4) (1+.10/4)^4-1
17% Monthly (12) (1+.17/12)^12-1
13% Daily (365) (1+.13/365)^365-1
9% Semi (2) (1+.09/2)^2-1
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