Question
Time valueJim Nance has been offered an investment that will pay him $500 three years from today.a. If his opportunity cost is 7% compounded annually,
Time valueJim Nance has been offered an investment that will pay him $500 three years from today.a. If his opportunity cost is 7% compounded annually, what value should he place on this opportunity today?b. What is the most he should pay to purchase this investment today?c. If Jim can purchase this investment for less than the amount calculated in part a, what does that imply about the rate of return he will earn on the investment? CHAPTER 5Time Value of Money 237LG2 P5-14 Time valueAn Iowa state savings bond can be converted to $100 at maturity 6years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 3% annual interest (compounded annually), at what price must the state sell its bonds? Assume no cash payments on savings bonds prior to redemption.Personal Finance ProblemLG2 P5-15 Time value and discount ratesYou just won a lottery that promises to pay you $1,000,000 exactly 10 years from today. A company approaches you today, offering cash in exchange for your winning lottery ticket.a. What is the least you will sell your claim for if you can earn the following rates of return on similar-risk investments during the 10-year period?(1) 6%(2) 9%(3) 12%b. Rework part a under the assumption that the $1,000,000 payment will be received in 15 rather than 10 years.c. On the basis of your findings in parts a and b, discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum.Personal Finance ProblemLG2 P5-16 Time value comparisons of single amountsIn exchange for a $23,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 9%.AlternativeSingle amountA$28,500 at end of 3 yearsB$54,000 at end of 9 yearsC$160,000 at end of 20 yearsInvestmentPriceSingle cash inflowYear of receiptA$18,000$30,000 5B6003,00020C3,50010,00010D1,00015,00040a. Find the value today of each alternative.b. Are all the alternatives acceptable? That is, are they worth $23,000 today?c. Which alternative, if any, will you take?Personal Finance ProblemLG2 P5-17 Cash flow investment decisionTom Alexander has an opportunity to purchase any of the investments shown in the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given for each investment. Which purchase recommendations would you make, assuming that Tom can earn 10% on his investments?XMyLabISBN 1-323-84127-XPrinciples of Managerial Finance, Fifteenth Edition, by Chad J. Zutter and Scott B. Smart. Published by Pearson. Copyright 2019 by Pearson Education, Inc.
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