1) Which of the following would your client be better off choosing if the discou
ID: 2814349 • Letter: 1
Question
1) Which of the following would your client be better off choosing if the discount rate if 8%?
$5,000 today
$5,350 received at the end of the year
$6,250 received at the end of the third year
$5,750 received at the end of the second year
2) How much would $1,000 grow to in 30 years if the reinvestment rate is 20%?
$190,047
$237,376
$36,000
$20,000
3) What is the discount rate of interest given the following information: current price is $948, six years of $50 cash flow that you will receive, and a value of $1,000 that comes to you at the end of the six years?
6.79%
4.26%
6.06%
5.60%
4) What is the approximate present value the following cash flows if the discount rate if 12%? (Each of the cash flows is received at the end of the period.)
Year 1 $10,000
Year 2 $15,000
Year 3 $18,000
$33,700
$37,700
$35,100
$43,000
a.$5,000 today
b.$5,350 received at the end of the year
c.$6,250 received at the end of the third year
d.$5,750 received at the end of the second year
Explanation / Answer
1. If Discount rate is 8%, then it would be better to choose option a) 5000 today
Explaination :
Present value of $ 5350 Received at the end of first year = $5350 * Present value factor (8%, 1 ) = $5350 * 0.9259 = $4953
Present value of $ 6250 Received at the end of Third year = $6250 * Present value factor (8%, 3 ) = $6250 * 0.7938 = $4961
Present value of $ 5750 Received at the end of Second year = $5750 * Present value factor (8%, 2 ) = $5750 * 0.8573 = $4930
Therefore its better off choosing $ 5000 today
2) How much would $1,000 grow to in 30 years if the reinvestment rate is 20%
Answer = b) 237,376
Explanation : Future value = Present value * ( 1 + interest Rate)^30
= $ 1000 * ( 1 + 0.20 )^ 30
= $1000 * 237.3763
= $ 237376
3. ANSWER = C) 6.06%
Current price = $948
Six years of cash flow that you will receive = $50,
value that comes to you at the end of the six years = $1,000
Therefore
$948 = $ 50 * PVIFA ( i , 6) + $ 1000 * PVF (i , 6)
Using trial and error method,
4.
Year Cash flow PVF (6.06%) Present value 1 50 0.9428625 47.14 2 50 0.8889898 44.45 3 50 0.8381951 41.91 4 50 0.7903028 39.52 5 50 0.7451469 37.26 6 50 0.7025711 35.13 6 1000 0.7025711 702.57 Present value 948.0Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.