1. If you put up $27,000 today in exchange for a 7.75 percent, 11-year annuity,

Question

1. If you put up $27,000 today in exchange for a 7.75 percent, 11-year annuity, what will the annual cash flow be?

2. You want to have $63,000 in your savings account 8 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 7.7 percent interest, what amount must you deposit each year?

3. Prescott Bank offers you a $35,000, 8-year term loan at 10 percent annual interest. What will your annual loan payment be?

4. You want to start a business that you believe can produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $250,000. At a discount rate of 16 percent, what is this business worth today?

5. Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

6. You have been purchasing $12,000 worth of stock annually for the past eight years and now have a portfolio valued at $87,881. What is your annual rate of return?

Explanation / Answer

1

Annual payment is:

2

3

4

5

Purchase price is 266,498.33

6

At around -2.54% rate of return portfolio will reach 87,881

Annuity payment= P/ [ [1- (1+r)-n ]/r ] P= Present value 27,000.00 r= Rate of interest per period Rate of interest per annum 8% Payments per year 1.00 Rate of interest per period 7.750% n= number of payments: Number of years 11 Payments per year 1.00 number of payments 11 Annuity payment= 27000/ [ (1- (1+0.0775)^-11)/0.0775 ] Annuity payment= 3,736.32

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