Questions and Problems
6.1
Future value with multiple cash flows: Konerko, Inc., management expects the
company to earn cash flows of $13,227, $15,611, $18,970, and $19,114 over the next
four years. If the company uses an 8 percent discount rate, what is the future value of
these cash flows at the end of year 4? 74,472.48
6.3
Future value with multiple cash flows: You are a freshman in college and are planning
a trip to Europe when you graduate from college at the end of four years. You plan to
save the following amounts annually, starting today: $625, $700, $700, and $750. If you
can earn 5.75 percent annually, how much will you have at the end of four years?
3,185.40
6.4
Present value with multiple cash flows: Saul Cervantes has just purchased some
equipment for his landscaping business. For this equipment, he must pay the following
amounts at the end of each of the next five years: $10,450, $8,500, $9,675, $12,500, and
$11,635. If the appropriate discount rate is 10.875 percent, what is the cost in today’s
dollars of the equipment Saul purchased today? 38,652.76
6.7
An investment opportunity requires a payment of $750 for 12 years, starting a year from
today. If your required rate of return is 8 percent, what is the value of the investment to
you today? 5,652.o6
6.8
Dynamics Telecommunications Corp. has made an investment in another company that
will guarantee it a cash flow of $22,500 each year for the next five years. If the company
uses a discount rate of 15 percent on its investments, what is the present value of this
investment? 75,423.49
6.9
Robert Hobbes plans to invest $25,000 a year at the end of each year for the next seven
years in an investment that will pay him a rate of return of 11.4 percent. How much
money will Robert have at the end of seven years? 247,609.95
6.10
Cecelia Thomas is a sales executive at a Baltimore firm. She is 25 years old and plans to
invest $3,000 every year in an IRA account, beginning at the end of this year until she
reaches the age of 65. If the IRA investment will earn 9.75 percent annually, how much
will she have in 40 years, when she turns 65? 1,240.676.41
6.11
Refer to Problem 6.10. If Cecelia Thomas invests at the beginning of each year, how
much will she have at age 65? 1,361,642,36
Copyright ©2015 John Wiley & Sons, Inc.
SM 6-1
6.12
Computing annuity payment: Kevin Winthrop is saving for an Australian vacation in
three years. He estimates that he will need $5,000 to cover his airfare and all other
expenses for a week-long holiday in Australia. If he can invest his money in an S&P 500
equity index fund that is expected to earn an average annual return of 10.3 percent over
the next three years, how much will he have to save every year if he starts saving at the
end of this year? 1,506.20
6.13
The Elkridge Bar & Grill has a seven-year loan of $23,500 with Bank of America. It
plans to repay the loan in seven equal installments starting today. If the rate of interest is
8.4 percent, how much will each payment be? 4,221.07
6.14
Your grandfather is retiring at the end of next year. He would like to ensure that his heirs
receive payments of $10,000 a year forever, starting when he retires. If he can earn 6.5
percent annually, how much does your grandfather need to invest to produce the desired
cash flow? 153,846.15
6.16. Marshall Chavez bought a Honda Civic for $17,345. He put down $6,000 and financed
the rest through the dealer at an APR of 4.9 percent for four years. What is the effective
annual interest rate (EAR) if the loan payments are made monthly? 5
6.17
Cyclone Rentals borrowed $15,550 from a bank for three years. If the quoted rate (APR)
is 6.75 percent, and the compounding is daily, what is the effective annual interest rate
(EAR)? 6.98
6.18
You are evaluating a growing perpetuity investment from a large financial services firm.
The investment promises an initial payment of $20,000 at the end of this year and
subsequent payments that will grow at a rate of 3.4 percent annually. If you use a 9
percent discount rate for investments like this, what is the present value of this growing
perpetuity? 357,142.86
Copyright ©2015 John Wiley & Sons, Inc.
SM 6-2