Present Value and Multiple Cash Flows.
Investment X offers to pay you $3,700 per
year for nine years, whereas Investment Y offers to pay you $5,500 per year for five
years. Which of these cash flow streams has the higher present value if the discount rate
is 6 percent? If the discount rate is 22 percent?
Payment for X $ 3,700
# of years for X 9
Payment for Y $ 5,500
# of years for Y 5
Discount rate 6%
Discount rate 22%
PV at 6%
Value of X
Value of Y
PV at 22%
Value of X
Value of Y
Calculating Ordinary Annuity Present Values. 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 percent, what
is the value of the investment? What would the value be if the payments occurred for 40 years?
For 75 years?
Payment per year $ 6,700
# of years 15
Required rate of return 8%
# of years 40
# of years 75
Value today for 15 years payments
Value today for 40 years payments
Value today for 75 years payments
Calculating Ordinary Annuity Cash Flows. For each of the following ordinary annuities, ca
Input area:
Present Value Years Interest Rate Annuity Payment
$ 36,800 6 11%
27,500 8 7%
145,000 15 8%
215,000 20 6%
ordinary annuities, calculate the payment.
Calculating Annuity Values. If you deposit $5,000 at the end of each year for the next 20
years into an account paying 10.8 percent interest, how much money will you have in the
account in 20 years? How much will you have if you make deposits for 40 years?
Annual deposit $ 5,000
# of years 20
Interest rate on annuity 10.8%
# of years 40
Future value for 20 years
Future value for 40 years
each year for the next 20
oney will you have in the
sits for 40 years?
Calculating Ordinary Annuity Values. For each of the following annuities, calculate the
future value of the ordinary annuitites below.
Payment Years Interest Rate Future Value
$ 1,500 10 8%
5,000 40 9%
3,200 9 6%
7,500 30 10%
Calculating Annuity Due Values. For each of the following annuities, calculate the
future value of the annuitites due below.
Payment Years Interest Rate Future Value
$ 1,500 10 8%
5,000 40 9%
3,200 9 6%
7,500 30 10%
Week 4 Practice Problems
An overcrowded venue injured an atendee named Dan. The venue was found to be at fault of negligence.
Dan is injured and is unable to work. He is 50 years old and was earning $80,000 per year, and a stream of
payments for that amount would have likely accrued to him annually until he retired at 75 years old. In court
the judge and jury agrees. Assume Dan's salary grows at the same rate as expected annual inflation - 4.0%.
What is the future value of this annuity, the minimum basis for a possible settlement, if a fair settlement were
indeed on the table?
Aord =
You want to retire in 40 years. The plan is to save $1,500 at the beginning of every month for 40 years. The
money will be saved in an investment account which pays 6% compounded monthly. How much will you have
in your account in 40 years?
Adue =
You received a $430,000 fellowship stipend. The stipend will pay out equal monthly installments
over the next 7 years ($5,000 per month). Supposing that at the end of every month you deposit
the stipend into an investment account that is paying an average annual return of 6.5%
compounded monthly, how much would you have at the end of the seven years?
Aord =
Week 4 Practice Problems
A plane crashed and severely injured an artist named John. The plane company was found to be at fault of
negligence. John is injured and his music career is over. John is 50 years old and was earning $80,000 per year,
and a stream of payments for that amount would have likely accrued to him annually until he retired at 72 years
old. In court the judge and jury agrees. Assume John's salary grows at the same rate as expected annual inflation
- 4.0%.
What is the future value of this annuity, the minimum basis for a possible settlement with the relatives of the
victim, if a fair settlement were indeed on the table?
Aord = $2,739,837.58
1.3699187915
80,000 34.2480
0.04
You want to retire in 40 years. The plan is to save $1,500 at the beginning of every month for 40 years. The
money will be saved in an investment account which pays 6% compounded monthly. How much will you have in
your account in 40 years?
Adue = $3,002,172.28
Minus 1
1,500 10.012 2002.45 2001.45
0.005
You receive The MacArthur Fellowship is a $625,000. The fellowship comes with a stipend of $625,000, paid out
in equal quarterly installments over five years (therefore, $31,250 per quarter).
Supposing that at the end of every quarter you deposit the stipend into an investment account that is paying an
average annual return of 8.5% compounded quarterly, how much would you have at the end of the five years?
Aord = $768,815.91
0.52279481992
31,250 24.6021
0.02125
to be at fault of
ng $80,000 per year,
he retired at 72 years
pected annual inflation
the relatives of the
$2,739,837.58
or 40 years. The
much will you have in
$3,002,172.28
of $625,000, paid out
ount that is paying an
nd of the five years?
$768,815.91