Question

Q3 Q4 Q5

o3. Consider the following capital market. You want to be able to withdraw 1$150K five years earn a 4.2% rate of return per year, how much do you need to invest today? (b) If you can earn 4.2%/year, how much do you need to invest one year from today? (e) If you can earn 4.2%lyear, how much must you deposit at the end of each year for 5 years? (d) How much must you deposit at the beginning of each year for 5 years? from today in order to pay for your entire graduate school education. (a) If you can Q4. You have invested in a perpetuity, the cash flows of which can be gifted to your children, which can be gifted to their children, which can be gifted to those children's children, and so on. The perpetuity begins with a 1$90 cash flow four years from now and continues forever. Using a discount rate of 10%, determine what this payoff is worth to you in today's dollar terms. Q5. You plan to purchase a taco bar from Daddy Yankee. The taco bar's forecasted future cash flows are: 1$100K at t-2, I$140K at t-4, and 1$125K at t-7. The uncertainty surrounding these future CFs is such that a 5.40% rate of return is appropriate for valuation.(a) What would be a fair price to pay Daddy Yankee today?(b) If you wanted to try to "make" 1$50K on this deal, what price should you try to pay to Daddy Yankee? Textbook Chapter 6: Q3, Q8, Q23, Q50, Q52

Answer 1

A	B	C	D	E	F	G	H	I	J	K
2
3		3)
4		a)
5		FV	$150,000.00
6		Interest rate	4.20%
7		Period	5	Years
8		Amount to be deposited today will be the present value of the future value required.
9
10		Amount To be deposited	=$150,000 / (1+4.2%)5
11			$122,110.40	=D5/((1+D6)^D7)
12
13		Hence the Amount To be deposited today is	$122,110.40
14
15		b)
16		FV	$150,000.00
17		Interest rate	4.20%
18		Period	4	Years	(Since amount is deposited after one year)
19		Amount to be deposited after one year will be the present value of the future value at year 1.
20
21		Amount To be deposited	=$150,000 / (1+4.2%)4
22			$127,239.04	=D16/((1+D17)^D18)
23
24		Hence the Amount To be deposited after one year is	$127,239.04
25
26		c)
27
28		FV	$150,000.00
29		Interest rate (i)	4.20%
30		Period (n)	5	Years
31		Amount to be deposited each year will be such that the future value of the deposit will be the future value required.
32
33		Amount To be deposited at the end of each Year	=$150,000/(F/A,4.20%,5)
34			$27,583.60	=D28/FV(D29,D30,-1,0)
35
36		Hence the Amount To be deposited at the end of each year is	$27,583.60
37
38		d)
39
40		FV	$150,000.00
41		Interest rate (i)	4.20%
42		Period (n)	5
43
44		Let X be the deposit at the beginning of each of year.
45		Then future Value at the beginning of Year 5	=X*(F/A,4.2%,5)
46
47		Then future Value at the end of Year 5	=X*(F/A,4.2%,5)*(F/P,4.2%,1)
48
49		Since future Value at the end of 5 year is	$150,000.00
50
51		Therefore
52		X=	=150000/[(F/A,4.2%,5)*(F/P,4.2%,1)]
53			$26,471.79	=D49/(FV(D41,D42,-1,0)*((1+D41)^1))
54
55		Hence amount deposited at the beginning of each of year is	$26,471.79
56