10. What is the value of a semi-annual annuity of $200 per year for four years i

Question

10. What is the value of a semi-annual annuity of $200 per year for four years if the discount rate is 5%?

11. What is the value of a semi-annual annuity of $200 per year for four years if the discount rate is 5%, but the cash flows do not begin until 12 months from now?

7. A late night TV ad offers the following: send in $120 today, and you will receive payments for three years (beginning next year). The first payment will be $40 and each subsequent year the payment will be increased by $10. Would you accept this offer if the appropriate discount rate is 8%? Why? What if the discount rate is 15%?

Explanation / Answer

Future value of annuity formula;

FV= A [ (1+k)n-1/k]

FV = Future anuuity value

A = periodical payment =$100 semi annually

K=interest rate=5/2=2.5% semi annual

N=periods=8 semi annual

Therefore , FV= 100[(1.025)8-1]/0.025

=100*(0.218)/0.025

=872

Therefore value of the annuity will be $872

11. here n=6 semi annual payments

So, FV= 100[(1.025)6-1]/0.025

=640

So , annuity value will be $640 in this case.

7.

Details Year 0 Year 1 Year 2 Year 3 Out flow $ -120 Inflow $ 40 50 60 Discounting factor @ 8% 1              0.926              0.857              0.794 PV of inflows              37.04              42.87              47.63 Sum of PV            127.53 NPV of invetment                 8.53 The offer is acceptable @8% discount rate as NPV is positive Discounting factor @15%              1.000              0.870              0.756              0.658 PV of inflows            34.783            37.807            39.451 Sum of PV          112.041 NPV of invetment              (7.96) The offer is not acceptable at 15% discount rate as NPV is negative

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.