Question

1.

Calculate the value of the cash flows at time 6. The interest rate is 10.04%.

0	1	2
$1,055	$2,408	$3,350

2. Suppose that 2 years ago you bought an old record player at a yard sale for $3. You saw today on E-bay that the same record player is selling for $67. If you were to sell the record play at that price today, what would be the implied return percentage? (Convert to a percent. Round to 2 decimal places.

Answer 1

Answer to Q#1 (First question in the list): Cash flow in year-O will earn interest for next 6 years; Cash flow in year-1 will earn interest for next 5 years; Cash flow in year-2 will earn interest for next 4 years. There are no other cash flows after year-2. Therefore, Future value of a lumpsum deposit = Initial amount of deposit x (1 + Periodic interest rate)# of periods of deposit to maturity Future value of cash flow of year-O in time 6 Future value of cash flow of year-1 in time 6 Future value of cash flow of year-2 in time 6 Future value of cash flow of year-3 in time 6 Future value of cash flow of year-4 in time 6 Future value of cash flow of year-5 in time 6 Future value of cash flow of year-6 in time 6 Future value of the given cash flow strem in time 6 $1,873.08 $3,885.16 $4,911.87 $0.00 $0.00 $0.00 $0.00 $10,670.12 Workings: Cash flows Interest rate per year # of years left to maturity Future value in time 6 Year-0 Year-1 $1,055 $2,408 10.04% 10.04% 6 5 $1,873.08 $3,885.16 Year-2 $3,350 10.04% 4 $4,911.87 Year-3 $0 10.04% 3 $0.00 Year-4 $0 10.04% 2. $0.00 Year-5 $0 10.04% 1 $0.00 Year-6 $0 10.04% O [As explained] $0.00 (Ref: NOTE]

NOTE: Future value of Year-0 = $1055 x (1+10.04%)^6 = $1055 x 1.100446 = $1055 x 1.77543 = $1873.08; Future value of Year-1 = $2408 x (1+10.04%)^5 = $2408 x 1.1004^5 = $2408 x 1.61344 = $3885.160; Future value of Year-2 = $3350 x (1+10.04%)^4 = $3350 x 1.1004^4 = $3350 x 1.46623 = $4911.87; Future value of Year-3 = $0 X (1+10.04%)^3 = $0 x 1.1004^3 = $0 x 1.33245 = $0.00; Future value of Year-4 = $0 X (1+10.04%)^2 = $0 x 1.1004^2 = $0 x 1.21088 = $0.00'; Future value of Year-5 = $0 x (1+10.04%)^1 = $0 x 1.1004^1 = $0 x 1.1004 = $0.00; Future value of Year-6 = $0 x (1+10.04%)^0 = $0 x 1.1004^0 = $0 x 1 = $0.00.