$100 is received at the beginning of year 1, $200 is receivedat the beginning of...

$100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are invested at 12 percent, what will their future value be at the end of year 3?
What is the present value of a $25,000 perpetuity be if the discount rate (required rate of return) is 14 percent? (HINT: Excel does not have a built-in formula for perpetuity. You will need to use the formula for the present value of a perpetuity.)
Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill expects to earn 12 percent on his contributions, how much will he have at the end of the twentieth year?

Expert Solution

Solution :- (a)

Future Value at the end of Year 3 =

= $100 * (1 + 0.12)³ + $200 * (1 + 0.12)² + $300 * (1 + 0.12)³

= ( $100 * 1.405 ) + ( $200 * 1.2544 ) + ( $300 * 1.12 )

= $727.37

(b) Present Value of Perpetuity = Cash flow / Discount Rate = $25,000 / 0.14 = $178,571.4

(c) Value at the end of 20th Year = $2,000 * FVAF ( 12% , 20 )

= $2,000 * 72.053

= $144,106

jeff jeffy answered 2 years ago

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