Curly S Life Insurance Co. Is Trying To Sell You An Investment Policy That Will Pay You And Your Heirs 20 000 Per Year Forever. If The Required Return On This Investment Is 8 Percent How Much Will You Pay For The Policy


2. Present Value and Multiple Cash Flows. Investment X offers to pay you

$5,500 per year for 9 years, whereas Investment Y offers to pay you $8,000 per year for 5 years. Which of these cash flow streams has the higher present value if the discount rate is 6 percent? If the discount rate is 22 percent?

3. Future Value and Multiple Cash Flows. Rally. Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future value at a discount rate of 11 percent? At 24 percent?

Year Cash Flow

2 900

3 1.400

4 2,000

4. Calculating Annuity Present Value. An investment offers $7,000 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 9 percent, what is the value of the investment? What would the value be if the paytnenls occurred for 40 years? For 75 years? Forever?

5. Calculating Annuity Cash Flows. If you put up $20,000 today in exchange for a 8,5 percent, 12-year annuity, what will the annual cash flow be?

6. Calculating Annuity Values. Your company will generate $50,000 in cash flow each year for the next nine years from a new information database. The computer system needed to set up the database costs $300,000. If you can borrow the money to buy the computer system at 8.25 percent annual interest, can you afford the new system?

7. Calculating Annuity Values. If you deposit $3,000 at the end of each of the next 20 years into an account paying 9.5 percent interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?

8. Calculating Annuity Values. You want to have $30,000 in your savings account eight years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 5.25 percent interest, what amount must you deposit each year?

9. Calculating Annuity Values. Bath's Bank offers you a $50,000. seven-year term loan at 8 percent annual interest. What will your annual loan payment be?

0. Calculating Perpetuity Values. Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 7 percent, how much will you pay for the policy?

1. Calculating Perpetuity Values. In the previous problem, suppose Curly's told you the policy costs $400,000. At what interest rate would this be a fair deal?

2. Calculating EAR. Find the EAR in each of the following cases:

Stated Rate (APR) Number of Times Compounded Effective Rate (EAR)

9% Quarterly

13 Monthly

16 Daily

19 Semiannually

13. Calculating APR. Find the APR. or staled rate, in each of the following cases:

Stated Rate (APR) Number of Times Compounded

Effective Rate (EAR)




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