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Present Value Applications

In: Business and Management

Submitted By mere
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Present Value Applications

2. You are given a choice of being paid either $18,000 now or $20,000 two years from now.
Which would you rather have, assuming you could earn 10% interest on any cash you have now?

18,000(121) = 21,780
It would be better to have 18,000 now than to have 20,000 in 2 years.

4. Would you be better off accepting $27,000 now or $10,000 at the end of each of the next three years, assuming that you can earn interest at 1) 6%? or 2) 4%?

6% 27,000(1.19102) = $32,157.54
4% 27,000(1.12486) = $30,371.22

6% 10,000(3.1836) = $31,836.00
4% 10,000(3.1216) = $31,216.00
If you can get 6% interest rate, then it is better to accept $27,000, but if you can only get 4% then it is better to accept $10,000.

6. An investor has $100,000 to invest for a period of 12 years and he desires an accumulation of $200,000 at the end of the period. Approximately what rate of compound interest must his money earn?

$100,000 = $200,000(PVF i=?, n=12)
200,000 ÷ 100,000 = 2
2 = (n=12, i=6%)
6% interest rate

8. A company buys some new office equipment and agrees to pay it off in 24 monthly payments of $20,000 each, beginning at the end of the first month. The payments included
24% annual interest on the unpaid loan balance as of the beginning of each month.
a. What is the cost of the office equipment? (Remember, monthly compounding!)

Office equipment cost is, 24,000(30.42186) = $730,124.64

b. What is the interest expense for the first month? The second? The third?

The first month interest expense is $9,078.69
The second month interest expense is $8,780.69
The third month interest expense is $8,475.86

10. Find the present values for each of the following sets (A - F) of dollar payments if the discount rate is (a) 10%, (b) 15%.
Received at
Beginning of Year A B C D E F

Received at the start of the year A B C D E F
1

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