PART 1:
The present value of an ordinary annuity is $13,000. What would be the present value of this annuity if the payments were to be received at the beginning of each period? Assume the interest rate is 18%.
A. $16,500
B. $13,636
C. $15,340
D. Insufficient information to determine – we need to know the
specific cash flows and the timing
PART 2:
If you were offered a stream of cash flows of $1500 per year forever and the appropriate interest rate for an investment of this risk level was 6.8%, what is the most that you should be willing to pay for this deal?
A. Approx. $22,059
B. Approx. $18, 667
C. Approx. $8,333
D. It has infinite value because it is an infinite stream of cash
flows
PART 1 | ||||||||
Present value of an annuity due = Present value of an ordinary annuity*(1+r) | ||||||||
r is the interest rate | ||||||||
Present value of the annuity due = 13000*(1+.18) | ||||||||
Present value of the annuity due = 15340 | ||||||||
The present value of the annuity if the payments were to be received at the beginning | ||||||||
of each period is | ||||||||
C) $15340. | ||||||||
PART 2 | ||||||||
Present value of a perpetuity = C/r | ||||||||
where C is the payment per year that is 1500. | ||||||||
r is the interest rate that is .068. | ||||||||
Present value of the perpetuity = 1500/.068 | ||||||||
Present value of the perpetuity = 22058.82. | ||||||||
A) Approx $22059. |
PART 1: The present value of an ordinary annuity is $13,000. What would be the present value of this annuity if the paym...
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