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the world’s information, including webpages, images, videos and more. Google has many special… 1 answer below » the world’s information, including webpages, images, videos and more. Google has many special features to help you find exactly what you’re looking for. Document Preview: BFM 1014 FUNDAMENTAL OF FINANCE
Trimester 2, 2015-2016
CHAPTER 5: DISCOUNTED CASH FLOW VALUATION
CRITICAL THINKING AND CONCEPT REVIEW
Concepts Review and Critical Thinking Questions
1. As you increase the length of the time involved, what happens to the present value of an annuity? What happens to the future value?
3. View complete question » the world’s information, including webpages, images, videos and more. Google has many special features to help you find exactly what you’re looking for. Document Preview: BFM 1014 FUNDAMENTAL OF FINANCE
Trimester 2, 2015-2016
CHAPTER 5: DISCOUNTED CASH FLOW VALUATION
CRITICAL THINKING AND CONCEPT REVIEW
Concepts Review and Critical Thinking Questions
1. As you increase the length of the time involved, what happens to the present value of an annuity? What happens to the future value?
3. Tri-State Megabucks Lottery advertises a $10 million grand prizes. The winner receives $500,000 today and 19 annual payments if $500,000. A lump sum option of $5 million payable immediately is also available. Is this deceptive advertising?
4. Suppose you won the Tri-State Megabucks Lottery in the previous question. What factors should you take into account in deciding whether you should take the annuity option or the lump sum option?
QUESTIONS AND PROBLEM
3. Havana, Inc has identified an investment project with the following cash flows. If the discount rate is 8% what is the future value of these cash flows in year 4? What is the future value at an interest rate of 11% at 24%
Year
Cash Flow $
1
1,075
2
1,235
3
1,510
4
1,965
4. An investment offers $6,700 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 8%, what is the value of the investment? What would the value be if the payment occurred for 40 years? For 75 years? Forever?
10. Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 6%, how much will you pay for the policy?
12. Find the EAR in each of the following cases:
Stated Rate (APR)
Number of times compounded
Effective Rate (EAR)
10 %
Quarterly
17
Monthly
13
Daily
9
Semiannually
15. Magnus Credit Corp wants to earn an effective annual return on its consumer loans of 17% per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to… Attachments: 40710-TUTORIA….docx View less » Dec 22 2015 08:58 PM
