1. Frank Zanca is considering three different investments that his broker has offered to him. The different cash flows are as follows:
End of Year | A | B | C |
1 | 300 | 400 |
|
2 | 300 |
|
|
3 | 300 |
|
|
4 | 300 | 300 | 600 |
5 | 300 |
|
|
6 | 300 |
|
|
7 | 300 |
|
|
8 | 300 | 600 |
|
Because Frank has enough savings for only one investment, his broker has proposed the third alternative to be, according to his expertise, the best in town. However, Frank questions his broker and wants to eliminate the present value of each investment. Assuming a 15% discount rate, what is Frank's best alternative?
2. What is the present value of the following perpetuities?
a. $600 discounted at 7%
b. $450 discounted at 12%
c. $1,000 discounted at 6%
d. $880 discounted at 9%
3. Delight Candy, Inc. is choosing between two bonds in which to invest their cash. One bond is being offered from Hershey’s and will mature in 10 years and pays 12% per year, compounded quarterly. The other alternative is a Mars bond that will mature in 20 years and that pays 12% per year, compounded quarterly. What would be the present value of each bond if the discount rate is 10%?
4. In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:
a. you want to deposit an amount annually at the end of each year?
b. you want to deposit one large lump sum today?
12 years ago
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