PROBLEM 6 (15 Points) Your grandfather would like to share some of his fortune w

Question

PROBLEM 6 (15 Points) Your grandfather would like to share some of his fortune with you. He offers to give you money under three different scenarios. a. S10,500 per year at the end of each year for the next 10 years. b. S60,000 right novw c. $120,000 at the end of 12 years REQUIRED: Calculate the Present value of each alternative using an 8.5% discount rate. PROBLEM 7 (5 Points) What interest rate compounded semi-annually is required to attain S750,000 at the end of 10 years if you start with S10,000?

Explanation / Answer

a) Present value of alternative
Amount to be paid every year * PVAF(8.5%, 10)
= $10500*6.561348
= $68894.1546
Note: PVAF(8.5%, 10) can be found out using the present value tables or a calculator.

If you're using a financial calculator, you might plug in
PMT= $10500
I/Y= 8.5
N= 10
CPT PV = $68894.1546

b) Present value of this option is $60000
c) $120000 at the end of 12 years = $120000*PVF(8.5%, 12) = $120000*0.3757 = $45084.20
f you're using a financial calculator, you might plug in
FV = $120000
I/Y= 8.5%
N= 12
CPT PV = $45084.202

Since the present value in Option (a) is the highest, the same can be chosen

7) We have
n= 10 years or 20 half years
Present value = $10000
Future value = $750000
Future value = Present value*(1+r)n
(1+r)20 = Future value/Present value
= $750000/$10000
= 75
(1+r)20 = 75
(1+r) = (75)(1/20)
(1+r) = 750.05 = 1.2409
r = 0.2409 or 24.09%

So, semiannual rate = 24.09%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.