The present value of an annuity is the sum of the discounted value of oll future cash flow You have the opportunity to invest in several annuities. Which of the following 10 year annuities has the greatest premont value (PV)7 Assume that all annuities eam the same positive interest rate. O An annuity that pays $500 at the beginning of every six months An annuity that pays $1,000 at the end of each year An annuity that pays $1,000 at the beginning of each year An annuity that pays $500 at the end of every six months An ordinary annuity selling at $4,947.11 today promises to make equal payments at the end of each year for the next eight years (N). If the annuity's appropriate interest rate (1) remains at 6.50% during this time, the annual annuity payment (PMT) will be You just won the lottery. Congratulations! The jackpot is $35,000,000, paid in eight equal annual payments. The first payment on the lottery jackpot will be made today. In present value terms, you really won assuming annual interest rate of 6.50% Consider the case of the following annuities, and the need to compute either their expected rate of return or duration Ryan inherited an annuity worth $3,280.16 from his uncle. The annuity will pay him five equal payments of $800 at the end of each year. The annuity fund is offering a return of Ryan's friend, Sebastian, wants to go to business school. While his father will share some of the expenses, Sebastian still need to put in the rest on his own, But Sebastian has no money saved for it yet. According to his calculation, it will cost him $30,044 to complete the business program, including tuition, cost of living, and other expenses. He has decided to deposit $4,200 at the end of every year in a mutual fund, from which he expects to earn a forced 7% rate of return. It will take approximately for Sebastian to save enough money to go to business School Perpetuities are also called annuities with an extended or unlimited life. Based on your understanding of perpetuities, answer the following questions, Which of the following are characteristics of a perpetuity? Check all that apply. A perpetuity is a stream of regularly timed, equal cash flows that continues forever The value of a perpetuity is equal to the sum of the present value of its expected future cash flows The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant in the future) cash flows. The value of a perpetuity cannot be determined, A local bank's advertising reads: "Give us $15,000 today, and we'll pay you 5000 every year forever. If you plan to live forever, what annual interest rate will you earn on your deposit? 3.60 4.00% 5.6096 0 3.209 Oops! When you went into make your deposit, the bank representative sad the amount of required deposit reported in the advertisement was Incorrect and should have read $22,500. This revision, which will the interest rate earned on your deposited funds, will adjust your earned interest rate to A series of cash flows may not always necessarily be an annually, Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply. Consider the following case The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palou over the next six years. Year 1 $400,000 Year 2 $20.000 Annual Cash Flows Year 3 Year 4 $180,000 $300,000 Year 5 Year 6 $350,000 $225,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 9%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dottar? 5600,000 $1,975,000 $1,395,097 51,775,000 Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Uneven Cash Flows Annuity Payments Description Debibite has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary Increased by 15% every year in the last three years o o You dopout a certain equal amount of money every year into your pension fund. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange-traded fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest. 12. Nonannual compounding period The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. An Investor can Inwest money with a particular bank and earn a stated interest rate of 6.60%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer He particularly likes his local bank because he is being offered a nominal rate of 6%. But the bank is compounding monthly. What is the effective interest rate that Rahul would pay for the loan? 6.046% 6.168% 6,345% 6.351% Another bunk is also offering favorable terms, so Rahul decides to take a loan of $18,000 from this bank. He signs the loan contract at 10% compounded daily for three months. Based on a 365-day year, what is the total amount that Rahul owes the bank at the end of the loan's term? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.) $19,194.09 $19,378.65 $18,455.86 O $18,086.74