Question

In: Accounting

2.Find the future value in 7 years of the following cash flows: 2,000 in 2 years...

2.Find the future value in 7 years of the following cash flows: 2,000 in 2 years and 7,000 in 4 years. The interest rate is 7.6% p.a. compounded monthly for the first 5 years and 5.8% p.a. compounded half-yearly thereafter. (Correct your answer to the nearest cent without any unit (No need to put "$"). Do not use "," in your answer. e.g. 123456.78))

3.Your uncle offers to sell you his vintage Rolls Royce. He suggests a payment plan where you pay just $17,000 today, $7000 in 11 months and $12,000 in exactly 20 months from today. If the interest rate is 5.4% per annum compounding monthly, what is the value of the offer (in present day dollars, rounded to the nearest dollar; don’t show $ sign or commas)?

Solutions

Expert Solution

Future Value of Cash Flow =(Cash Flow)*((1+i)^N)
i=Interest Rate
N=Number of years to the future
Interest Rate for first 5 years:
7.6% compounded monthly
Monthly interest rate =(7.6/12)% 0.6333%             0.006333
Effective annual interest rate =R
1+R=(1+0.006333)^12=             1.0787
Effective annual interest rate =R=             0.0787 7.87%
Future Value of Cash Flow in 5 years
t N=(5-t) CF FV5=CF*(1.0787^N)
Year Number of years to future Cash Flow Future value at end of year 5
2 3 $2,000 $2,510.37
4 1 $7,000 $7,550.93
Total $10,061.29
Interest Rate after 5 years:
5.8% compounded halfyearly
Half yearly interest rate =(5.8/2)% 2.90% 0.0290
Effective annual interest rate =R
1+R=(1+0.0290)^2= 1.058841
Effective annual interest rate =R= 0.058841 5.8841%
N= Number of years to future =7-5 2
i= Annual effective interest rate 0.058841
Future value at end of Year 7 $11,280.16 (1061.29*(1.058841^2)
ANSWER:
11280.16
3 Present Value of Cash Flow =(Cash Flow)/((1+i)^N)
i=Interest Rate per month=(5.4/12)% 0.45% 0.0045
N=Month of Cash Flow
N CF PV=CF/(1.0045^N)
Month Cash Flow Present Value
0 $17,000 $17,000.00
11 $7,000 $6,662.68
20 $12,000 $10,969.39
SUM $34,632.06
Value of the offer $34,632.06
ANSWER:
34,632

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