Chapter 7- Homework Solutions

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Chapter 7- Homework Solutions Powered By Docstoc
					Chapter 7

Problem 1
                                                        Part A                                    Part B
            Annual Investment                        5000              5000               5000
            Number of Years                           35                35                 35
            Payments per Year                          1                 4                 12
                   Fund           Rate of Return   Annual           Quarterly           Monthly
            Money Market                3%          $302,310              $307,746        $308,985
            Long-Term Bond              7%          $691,184              $738,955        $750,439
            Conservative Stock          9%        $1,078,554           $1,196,408      $1,225,744
            Aggressive Stock           12%        $2,158,317           $2,570,496      $2,679,566
                                                 More frequent investing results in more compounding and hence higher future va

Problem 2
                    Period         Cash Flow A       Cash Flow B
                      1              25,000             5,000
                      2              20,000            10,000
                      3              15,000            15,000
                      4              10,000            20,000
                      5               5,000            25,000

            Rate:                               9%


                                       Part A           Part B
            Present Value             $61,686           $55,003     B's cash flows are worth less because their present value is lower
            Future Value              $94,912           $84,630     This is because the larger payments in B come later and are disco

                    Part C
                    Period         Cash Flow A       Cash Flow B
                      0              (50,000)          (50,000)
                      1               25,000             5,000
                      2               20,000            10,000
                      3               15,000            15,000
                      4               10,000            20,000
                      5                5,000            25,000
            IRR                       20.27%            12.01%
            RATE                       9.00%             9.00%

                    Part D:      If the required return in 9%, both investments are attractive because they earn more than 9%
                                 Of the two, the original investment is preferable because it has the highest PV and IRR

Problem 3
                                                         Costs         Savings Rate
                     Age                Year             4.2%              8%
                      5                  0              $18,326                             $43,643
                      6                  1              $19,096                             $47,134
                      7                  2              $19,898                             $50,905
                     8                    3              $20,733                             $54,977
                     9                    4              $21,604                             $59,376
                    10                    5              $22,512                             $64,126
                    11                    6              $23,457                             $69,256
                    12                    7              $24,442                             $74,796
                    13                    8              $25,469                             $80,780
                    14                    9              $26,539                             $87,242
                    15                    10             $27,653                             $94,222
                    16                    11             $28,815                            $101,759
                    17                    12             $30,025           Part A           $109,900
                    18                    13             $31,286     Year 1 cost            $118,692
                    19                    14             $32,600
                    20                    15             $33,969
                    21                    16             $35,396
                                                        $133,251     Years 13-16 will cost $133,251 in each years' respective FV
                                                         $31,286     Using FV Formula
Problem 4
                             Part A
                  Period              Cash Flow
                     0                ($175,000)
                     1                  $15,000
                     2                  $15,000
                     3                  $15,000
                     4                  $15,750
                     5                  $16,538
                     6                  $17,364
                     7                  $18,233
                     8                  $19,144
                     9                  $20,101
                    10                 $221,107

                  Part B         Take NPV of future cash flows:
                                      $168,946.14


                  Part D         Use IRR to determine yield:
                                            10.45%
                                 Since you need 11%, you should reject this price.

Problem 5

            Payments                             30
            Future Value                $85,000,000
 Part A     Annual Payment            $2,833,333
 Part B     Rate                               7.5%
            Present Value             $33,462,761   (Note 1: there is no future value because no payout comes at the end of 30 period
                                        $35,972,468 (Note 2: if the first payment would have been made immediately, the cash option
        Part B                               Part D chart (See Secenario Manager for Part C)
                  5000            5000
                   35              35                              Effects of More Frequent Compounding
                   26              52
               Bi-Weekly        Weekly           $3,000,000
                  $309,320       $309,464
                                                 $2,500,000
                  $753,590       $754,948                                                                             Annual
                $1,233,860 $1,237,367            $2,000,000                                                           Quarterly
                $2,710,211 $2,723,518
re compounding and hence higher future values.   $1,500,000                                                           Monthly
                                                                                                                      Bi-Weekly
                                                 $1,000,000
                                                                                                                      Weekly
                                                  $500,000

                                                         $0
                                                                  Money      Long-Term Conservative Aggressive
                                                                  Market       Bond       Stock       Stock




rth less because their present value is lower
 ger payments in B come later and are discounted more than in A




ve because they earn more than 9%
 t has the highest PV and IRR




                   Part C                                                  Part D                   Part D (mo.)                  Part E
                 Need $109,900 in 12 years; can earn 8% along the way      Nominal   Accruing @8%                  Nominal
                                                                            $5,791       $5,791       $456.95       $4,464
                                                                            $5,791       $6,254                     $4,464
                                                                           $5,791          $6,755                 $4,464
                                                                           $5,791          $7,295                 $4,464
                                                                           $5,791          $7,879                 $4,464
                                                                           $5,791          $8,509                 $4,464
                                                                           $5,791          $9,190                 $4,464
                                                                           $5,791          $9,925                 $4,464
                                                                           $5,791         $10,719                 $4,464
                                                                           $5,791         $11,577                 $4,464
                                  Part B                                   $5,791         $12,503                 $4,464
                                $109,900    Year 13 PV of All Costs        $5,791         $13,503      $109,900   $4,464
                                  $87,406   …                              $5,792           $14,583    $118,692   $4,464
                                  $61,799   Whose required amout at the start of college is $109,900
                                  $32,774
                                     $0
$133,251 in each years' respective FV




use no payout comes at the end of 30 periods)
ve been made immediately, the cash option would be this)
Annual
Quarterly
Monthly
  Weekly
Weekly




            Part E
      Accruing @8%   $10,000
          $4,464     $10,800
          $4,821     $11,664
$5,207    $12,597
$5,624    $13,605
$6,074    $14,693
$6,559    $15,869
$7,084    $17,138
$7,651    $18,509
$8,263    $19,990
$8,924    $21,589
$9,638    $23,316
$10,409   $25,182   $109,900
$11,242   $27,196   $118,692
Scenario Summary
                  Current Values:       Annual      Quarterly       Monthly     Bi-Weekly
Changing Cells:
           $D$7                   1           1            4             12           26
Result Cells:
           $D$9         $302,310      $302,310     $307,746       $308,985      $309,320
           $D$10        $691,184      $691,184     $738,955       $750,439      $753,590
           $D$11 $1,078,554         $1,078,554   $1,196,408     $1,225,744    $1,233,860
           $D$12 $2,158,317         $2,158,317   $2,570,496     $2,679,566    $2,710,211
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
    Weekly

        52

  $309,464
  $754,948
$1,237,367
$2,723,518

				
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