Reference no: EM132664587

1. Renaissance Paper, Inc. needs to invest $8,000 at the end of each of the next five years to keep its current project going. If the firm can earn 7.5 percent annual compounding on its invested dollars, how much will it have to set aside today to ensure it will have the level of cash inflows it will need? (HINT: Be sure to recognize that the $8,000 annual investment required is the annuity payment, then draw a timeline to determine if you need to solve for future value or present value.) Check your answer by solving for payment.

2. The owners of the Beagle Brothers Automotive Store want to have $500,000 at the end of 15 years to supplement its pension income. The firm has been investing $10,000 at the end of each year for the last 15 years earning 8.2 percent compounded annually. (a) Are the Beagle Brothers investing enough each year to finance its supplementary retirement fund (how much will it has)? (b) how much more (less) does the firm need. (c) What annual amount should it be investing each year?

3. A competitor has approached the owners of the Lounge Lizards Bar with an offer to purchase their establishment. The potential purchasers offered to pay the owners of Lounge Lizards Bar $25,000 at the beginning of each year for the next ten years. When news of the offer became public knowledge, another competitor offered to pay the owners of the Lounge Lizards Bar $200,000 today. Assume the opportunity cost of investing for the owners of Lounge Lizards Bar is six percent annual discounting. (a) What is the value today of the first offer? (b) How much more (or less) is the second offer? (c) Which offer should the firm accept, and why? (d) If the first offer had been worth five thousand more dollars, which offer would you recommend Lounge Lizards Bar take? Why or why not?

4. Indiana "Hoosier" Insurance Agency offered to sell Dr. Natasha Phelps an annuity contract for $40,000. In return, the agreement stipulates that Indiana will pay Dr. Phelps $5,000 at the end of each of the next ten years. Dr. Phelps's opportunity cost of investment is eight percent annually. (a) What is the contract's worth to Dr. Phelps? (2) Should Dr. Phelps purchase the annuity contract? Why or why not?

5. Avenue Florist wants to purchase a new delivery truck. The truck has a purchase price of $65,000. The owners of Avenue Florist set aside $3,000 at the beginning of each year for the past ten years in an account paying 7.7 percent annually. (a) What do they have available to pay for the delivery truck? (b) By how much is the amount more (less) than what the company needed? (b) What amount should they have set aside?

6. Mr. Fox and his partners have created a database of security prices. This database is the most comprehensive of its kind. To manufacture CDs, once they have entered all the data, the partners will need $12,000 at the end of each of the next eight years. They have set aside $10,000 for each of the last five years. (a) If they can earn 8.5 percent annual compounding on their invested dollars, what is the level of cash flows they have available to fund their investment needs? (b) How much do they need to cover the firm's investment needs for the next eight years? (c) How much more (less) than what the company required do they have? (d) How much should they have set aside?

7. Five years ago, Ms. Dowell purchased preferred stock (perpetuity) that pays a fixed dividend of 15 percent of stock's par value ($100). (a) If her required rate of return is 11 percent, what is the current value of her preferred stock? (b) What has happened to interest rates since the firm issued the stock?

8. Kharma Vanderhoot sustained injuries in a car accident, and the jury awarded her a structured settlement that made a payment of $100,000 the first year. Then the costs will increase by four percent each year over the entire 15-year term of the contract. If the appropriate discount rate is seven percent, what is the present value of Kharma's structured settlement?

9. Little Nikki was injured in a school crossing zone by Samantha, a teenage driver who was texting her boyfriend after a bad breakup. Samantha's car was doing twice the legal speed limit. Poor little Nikki will need medical care for the rest of her life. The jury awarded Little Nikki a five percent growing perpetuity with the first payment of $350,000. If the appropriate discount rate is six percent, what is the present value today of Nikki's perpetuity?

10. Today, you received notification that you have won the Missouri Lottery and will receive $1,000,000 every year for 30 years and that payment will increase by three percent per year. If the appropriate discount rate is seven percent, what is the present value of your winnings?

11. Carol Kessler won the Reader's Digest Sweepstakes and had an option to receive $100,000 today or receive equal periodic payments at the end of each of the next five years. Her opportunity cost on investments is 14 percent compounded annually. (a) What annual amount should Ms. Kessler receive to equal the $100,000 lump-sum payment today? (b) Check your calculations by solving for the future value of the payments you solved for in part a.

12. Challenge Problem: Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you received your salary of $60,000, and you plan to spend all of it. You do want to start saving for retirement beginning next year. Thus, you have decided that one year from today, you will start depositing eight percent of your annual salary in an account that will earn ten percent per year. Your salary will increase by three percent per year throughout your career. You plan to retire 41 years from today. (a) What is the value today of your retirement account? (b) How much money will you have when you retire?