What is the present value of a perpetual stream of cash flow

Reference no: EM132065805

UNIT 3 ASSESMENT FINANCIAL MANAGEMENT

QUESTION 1

Much to your surprise, you were selected to appear on the TV show, "The Price is Right." As a result of your prowess in identifying how many rolls of toilet paper an average American family keeps on hand, you win the opportunity to choose one of the following: $2,000 today, $10,000 in 10 years, or $31,000 in 29 years. Assuming you can earn 12% on your money, which should you choose?

QUESTION 2

If you deposit $17,000 today in an account earning an annual rate of return of 10%, how much interest would be earned in the third year? How much would this amount differ from simple interest?

QUESTION 3

What is the present value of a perpetual stream of cash flow that pays $80,000 at the end of one year and grows at a rate of 5% indefinitely? The rate of interest used to discount the cash flows is 10%. What is the present value of the growing perpetuity?

QUESTION 4

Alex Karez has taken out a loan of $180,000 with an annual rate of 10% compounded monthly to pay off hospital bills from his wife's illness. If the most Alex can afford to pay is $3,500 a month, how long will it take to pay off the loan? How long will it take to pay off the loan if he can pay $4,000 each month? Use five decimal places for the monthly percentage rate in your calculations. If Alex can pay $3,500 a month, how many years will it take to pay off the loan?

QUESTION 5

How much do you have to deposit today so that, beginning 11 years from now, you can withdraw $9,000 a year for the next 8 years (periods 11 through 18) plus an additional amount of $18,000 in the last year (period 18)? Assume an interest rate of 6%.

Titman, S., Keown, A. J., & Martin J. D. (2014). Financial management: Principles and applications (12th ed.). Upper Saddle River, NJ: Pearson.

Reference no: EM132065805

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