1. Your folks just called and would like some advice from you. An insurance agen
ID: 2727933 • Letter: 1
Question
1. Your folks just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for $18,684.86 that will pay them $3,000 per year for 20 years. They don’t have the slightest idea what return they would be making on their investment of $18,864.86. What rate of return would they be earning? (Round to two decimal places).
2. On December 31, Beth bought a yatch for $120,000. She paid $14,000 down and agreed to pay the balance in 5 equal annual installments that include both the principal and 11 percent interest on the declining balance. How big will the annual payment be? (Round to the nearest dollar).
3. The state lottery’s million-dollar payout provides for $1.5 million to be paid in 20 installments of $75,000 per payment. The first $75,000 payment is made immediately, and the 19 remaining $75,000 payments occur at the end of each of the next 19 years. If 11% is the discount rate, what is the present value of the stream of cash flows? If 22 percent is the discount rate, what is the present value of the cash flows? (Round to nearest cent).
4. Lisa wants to have $1,000,000 in 60 years by making equal annual end-of-the-year deposits into tax-deferred account paying 10.00 percent annually. What must Lisa’s annual deposit be? (Round to the nearest cent)
5. What is the present value of a perpetual stream of cash flows that pay $2,000 at the end of the year one and the annual cash flows grow at a rate of 2% per year indefinitely, if the appropriate discount rate is 13%? What if the appropriate discount rate is 11%? (Round to nearest cent)
6. You are given three investments alternatives to analyze. The cash flows from these three investment are as follow:
End of Year
A
B
C
1
$2,000
2,000
4,000
2
3,000
2,000
4,000
3
4,000
2,000
(4,000)
4
(5,000)
2,000
(4,000)
5
5,000
4,000
14,000
(Round to the nearest cent)
End of Year
A
B
C
1
$2,000
2,000
4,000
2
3,000
2,000
4,000
3
4,000
2,000
(4,000)
4
(5,000)
2,000
(4,000)
5
5,000
4,000
14,000
Explanation / Answer
1. Amount received till 20 years = 3000 x 20 = $60000
Rate of return = (60000/18684.86 x 100) / 20 = 16.06% p.a.
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