Question

A- What is the present equivalent of the following cash flow? Assume interest rate is 8%.

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B- Imagine you have some rich cousin who looks down at you. She thinks you are incapable of managing your own affairs and talks you into supplementing some form of future retirement income through some individual retirement plan. You are supposed to retire in 15 years. You have to make 15 annual deposits into your account until you retire. The first deposit is $10K, and each subsequent deposit will increase at a 4% rate. Then, good times come and you can have 10 equal annual withdrawals. The last withdrawal is at the end of 25^th year. Calculate (A), the amount of the equal withdrawals that you will get in the last 10 years. Your cousin has told you that the interest rate will always remain at 8%, compounded annually. Also, draw the cash flow diagram.

C- Dr. Nariman Mostafavi is a capable researcher at Drexel, though he has an addiction to borrowing money thanks to a demanding family. 6 years ago he borrowed $6K, when the interest rates were 6.2%. Two years later he borrowed another $4K at 4.43% rate. Last year, he believed a deceiving TV commercial and borrowed another $10k at 16.5%. Now he wishes to consolidate his debt into a single 20-year loan with an annual, fixed 5% rate. If he starts making annual payments in 3 years, what is the amount of each payment? Also, draw the cash flow diagram. (Use formulas if you cannot find the interest rates in the tables).

D- You started a business plan and your income is as follows:

• Year 1: $40
• Year 2: $80
• Year 3: $120

What would be equivalent “4” year annuity?

Answer 1

16 12 24015 30253 13 24976 29132 14 25975 28053 15 27014 27014 582361 18 19 23 First we will compute value of loan today 40 37.04 68.59 120 95.26 200.88 2 25 Amount Period Interest rate 6.20% 8607.9226 4.43% 4757.3062 11650 25015.229 6 27 4 10000 16.50% Annuity 60.65 30 31 32 Add interest @ 5% for 3 yers 28958.254 Annual payment 2,323.69 34