Question
5. On completion of corporate finance course with Professor Paul C., Marla Lee was so pleased with the amount of useful and interesting knowledge that
5. On completion of corporate finance course with Professor Paul C., Marla Lee was so pleased with the amount of useful and interesting knowledge that she convinced her parents, who were wealthy alumni of Blink University where she was attending, to create an endowment. The endowment is to allow three needy to take the introductory finance course each year in perpetuity. The guaranteed annual cost of tuition and books for the course is $6,000 per student. The endowment will be created by making a single payment to the university. The university expects to earn exactly 6% per year on these funds.
a. How large an initial single payment must Marla's parents make to the university to fund the endowment?
b. What amount would be needed to fund the endowment if the university could earn 9% rather than 6% per year on the funds?
6. For each of the mixed streams of cash flows shown in the following table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12%, assuming that no withdrawals are made during the period and that the deposits are made
a. At the end of each year.
b. At the beginning of each year.
7. Gina Vitale has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay $24,000 at the closing of the transaction or will pay the amounts shown in the following table at the beginning of each of the next 5 years.
Gina doesn't really need the money today, thus she plans to let it accumulate in an account that earns 7% annual interest. Given her desire to buy a house at the end of 5 years after closing on the sale of the lot, she decides to choose the payment alternative: $24,000 single amount or the mixed stream of payments in the following table, that provides the higher future value at the end of 5 years. Which alternative will she choose?
Cash flow stream \begin{tabular}{crrr} Year & A & \multicolumn{1}{c}{ B } & \multicolumn{1}{c}{ C } \\ \hline 1 & $900 & $30,000 & $1,200 \\ 2 & 1,000 & 25,000 & 1,200 \\ 3 & 1,200 & 20,000 & 1,000 \\ 4 & & 10,000 & 1,900 \\ 5 & & 5,000 & \end{tabular} \begin{tabular}{cr} \multicolumn{2}{c}{ Mixed stream } \\ \cline { 1 - 1 } Beginning of year & Cash flow \\ \hline 1 & $2,000 \\ 2 & 4,000 \\ 3 & 6,000 \\ 4 & 8,000 \\ 5 & 10,000 \\ \hline \end{tabular}
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