What is the present value of this annuity

Reference no: EM1344650

1. Explain what stated rate will BankSouth have to offer to make its semiannual-compounding CD?

2 Now consider the surgery centers' goal of having $200,000 available in five years to buy a new patient billing system.
a. What lump sum amount must be invested today in a CD paying 10 percent interest to accumulate the needed $200,000?
b. What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?

3 Now consider a second alternative for accumulating funds to buy the new billing system. In lieu of a lump sum investment, assume that five annual payments of $32,000 are made at the end of each year.
a. What type of annuity is this?
b. What is the present value of this annuity if the opportunity cost rate is 10 percent annually? 10 percent compounded semiannually?
c. What is the future value of this annuity if the payments are invested in an account that pays 10 percent interest annually? 10 percent compounded semiannually?
d. What annual interest rate is required to accumulate the $200,000 needed to make the purchase, assuming a $32,000 annual payment?
e. What size annual payment is needed to accumulate $200,000 under annual compounding at a 10 percent interest rate?
f. Suppose the payments are only $16,000 each, but they are made every six months, starting six months from now. What will the future value be if the ten payments were invested at 10 percent annual interest? If invested at BankSouth at 10 percent compounded semiannually?

4 Now consider the uneven cash flow stream stemming from the lease agreement given in the case.
a. What is the present (Year 0) value of the annual lease cash flows if the opportunity cost rate is 10 percent annually?
b. What is the future value of this cash flow stream at the end of Year 5 if the cash flows are invested at 10 percent annually? What is the present value of this future value when discounted at 10 Percent? What does this result indicate about the consistency inherent intime value analyses?
c. Does the office renovation and subsequent lease agreement appear to be a good investment for the company? (Hint: Compare the cost of renovation with the present value of the lease payments. Use a 10 percent discount rate for the analysis).

5 Now assume that it is five years later and the company is unable to accumulate the $200,000 needed to make the software purchase. Instead, it is forced to borrow the $200,000. The loan calls for repayment in equal annual installments over a four-year period, with the first payment due at the end of one year. Assuming that the company can borrow the funds at a 10 percent rate, what amount of interest and principal will be repaid at the end of each year of the loan?

Reference no: EM1344650

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