Question

1) Eight years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 7.25 percent interest, compounded monthly?

A) $50,947.00

B) $51,226.00

C) $52,150.00

D) $59,177.00

E) $56,087.63

2. You have been told that you need $32,000 today for each $120,000 you want when you retire 28 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually.

A) 4.23 percent

B) 4.53 percent

C) 4.83 percent

D) 5.03 percent

E) 5.33 percent

3. Zinc Industries just signed a sales contract with a new customer. Zinc will receive annual payments in the amount of $62,000, $108,000, $135,000, and $150,000 at the end of Years 1 to 4, respectively. What is this contract worth at Year 0 if the firm earns 4.3 percent on its savings?

A) $468,761.21

B) $455,073.19

C) $478,415.12

D) $404,456.05

E) $430,511.07

Answer 1

1. Option (E) is correct

Here we will use the following formula:

PV = FV / (1 + r%)n

where, FV = Future value = $100000, PV = Present value, r = rate of interest = 7.25% compounded monthly, so monthly rate = 0.604166%, n= time period = 8 * 12 = 96 months

Now,putting the values in the above equation, we get,

PV = $100000 / (1 + 0.604166%)96

PV = $100000 / (1 + 0.00604166)96

PV = $100000 / (1.00604166)96

PV = $100000 / 1.78292440769

PV = $56087.63

So, inheritence is worth $56087.63 today.

2. Option (C) is correct

Here we will use the following formula:

FV = PV * (1 + r%)n

where, FV = Future value = $120000, PV = Present value = $32000, r = rate of interest, n= time period = 28

now, putting theses values in the above equation, we get,

$120000 = $32000 * (1 + r)28

$120000 / $32000 = (1 + r)28

3.75 = (1 + r)28

(3.75)1/28 = 1 + r

1.04833 = 1 + r

r = 1.04833 - 1

r = 0.04833 or 4.83%

3.Option (D) is correct

Here we will use the following formula:

PV = FV / (1 + r%)n

where, FV = Future value, PV = Present value, r = rate of interest = 4.3%, n= time period

For calculating the present value the given cash flows, we will calculate the present values of all the years and add them up. Now,putting the values in the above equation, we get,

PV = $62000 / (1 + 4.3%) + $108000 / (1 + 4.3%)2  + $135000 / (1 + 4.3%)3 + $150000 / (1 + 4.3%)4

PV = $62000 / (1 + 0.043) + $108000 / (1 + 0.043)2  + $135000 / (1 + 0.043)3 + $150000 / (1 + 0.043)4

PV = $62000 / (1.043) + $108000 / (1.043)2  + $135000 / (1.043)3 + $150000 / (1.043)4

PV = $59443.91 + ($108000 / 1.087849)  + ($135000 / 1.134626) + ($150000 / 1.183415)

PV = $59443.91 + $99278.48 + $118981.8844 + $126751.77

PV = $404456.05

So, required present value is $404456.05