Question

6- Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $58,000 per year for the next 11 years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

a. If Mr. Moore’s opportunity cost (potential return) is 10 percent, what is the present value of his consulting contract?

b. Assuming Mr. Moore will not retire for two more years and will not start to receive his 11 payments until the end of the third year, what would be the value of his deferred annuity?

7- You will receive $6,500 three years from now. The discount rate is 8 percent.

a. What is the value of your investment two years from now? Multiply $6,500 × (1/1.08) or divide by 1.08 (one year’s discount rate at 8 percent).

b. What is the value of your investment one year from now? Multiply your answer to part a by (1/1.08).

c. What is the value of your investment today? Multiply your answer to part b by (1/1.08)

d. Use the formula PV = FV × (1/(1+i)n) to find the present value of $6,300 received three years from now at 8 percent interest.

8- If you invest $18,500 today, how much will you have in each of the following instances? Use Appendix A as an approximate answer, but calculate your final answer using the formula and financial calculator methods.

a. In 9 years at 10 percent?

b. In 17 years at 10 percent?

c. In 18 years at 10 percent?

d. In 20 years at 10 percent (compounded semiannually)?

9- North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $9 per share. With the passage of time, yields have changed from the original 11 percent to 8 percent (yield is the same as required rate of return).

a. What was the original issue price?

b. What is the current value of this preferred stock?

10- Beverly Hills started a paper route on January 1. Every three months, she deposits $850 in her bank account, which earns 8 percent annually but is compounded quarterly. Four years later, she used the entire balance in her bank account to invest in an investment at 7 percent annually.

How much will she have after three more years? Use Appendix A and Appendix C for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

Answer 1

Annuity after retirement 58000

Time (n) = 11 years

Interest rate = 10% or 0.1

(a)

Present Value of annuity formula = Annuity *(1-(1/(1+i)^n))/i

58000*(1-(1/((1+0.010)^11)))/0.10

376713.5383

Present Value of his consulting contract is $376713.54.

(b) Value of annuity to be received after 2 years = Annuity Value after 2 years /(1+i)^2

Value of Annuity after 2 years shall be same as calculated above $376713.5383

Present Value of deferred Annuity =

376713.5383 /(1+0.10)^2

=311333.5027

So, present Value of deferred Annuity is $311333.50

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