Question 1

Willie Winn Track Shoes used the expected cash flow approach to determine the present value of a future obligation to be paid to Betty Will Company in four years. Estimated future payment possibilities were as follows:

Possible payment Probability

$100 million 20%

150 million 30%

180 million 40%

The risk-free interest rate is 5%. The present value of $1 in four periods at 5% is 0.82270. What is the estimated present value of the future obligation?

Question 2

R. Wright plans to make quarterly deposits of $200 for five years into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Wright have accumulated in the savings account at the end of the five-year period?

Future value of an ordinary annuity of $1 at 8% for five periods 6.3359

Future value of an annuity due of $1 at 8% for five periods 5.8666

Future value of an ordinary annuity of $1 at 2% for 20 periods 26.1833

Future value of an annuity due of $1 at 2% for 20 periods 24.2974