Application: Problem Solving 8.1Suppose you win a million-dollar lottery and are given a choice between $20,000 a year for 50 years (totalingS1,000,000) or immediate payment of S400,000. Suppose the interest rate is 7 percent. Which would you choose?To make the right choice, you need to calculate the present value of the stream of payments.a. How much is the present value of this million-dollar prize?b. Discuss elaborately your analysis based on your calculations.

We will have to compute present value of the choice of receiving $20,000 a year for 50 years and the…

$1,000,000) or immediate payment of $400,000. Suppose the interest rate is 7 percent. Which would yo To make the right choice, you need to calculate the present value of the stream of payments. a. How much is the present value of this million-dollar prize? b. Discuss elaborately vour analysis based on vour calculations

$1,000,000) or immediate payment of $400,000. Suppose the interest rate is 7 percent. Which would yo To make the right choice, you need to calculate the present value of the stream of payments. a. How much is the present value of this million-dollar prize? b. Discuss elaborately vour analysis based on vour calculations

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Consider the cash flow shown in the graph and assume that the interest rate is 10%. What is the value of X at to ensure that cash flow shown has a future value of $1,500,000? Answer to the closest dollar.
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Use a calculator to evaluate the amortization formula for the values of the variables P, r, and t (respectively). Assume n = 12. (Round your answer to the nearest cent.) $14,000; 5%; 4 yr
(Present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: @ End of Year 1 W 5 2 3 4 12 5 s damaged 30 6 X 7 8 3 a. What is the present value of investment A at an annual discount rate of 21 percent? $(Round to the nearest cent.) b. What is the present value of investment B at an annual discount rate of 21 percent? $(Round to the nearest cent.) c. What is the present value of investment C at an annual discount rate of 21 percent? (Round to the nearest cent.) 80 F3 E A $11,000 11,000 11,000 11,000 11,000 D C $ 4 DDD DOD F4 R Investment B F 1 $11,000 11,000 11,000 11,000 % 5 V is FS T G A 6 C $16,000 B 48,000 MacBook Air F6 Y & 7 H 44 F7 U N * CO 8 J DII FA 1 ( M 9 K MOSISO 19 O 1 0 V I 4 F10 11 P > command 4 ● FII + B = { [ I Next F12 .. ? option
10. You are considering buying an asset which will give you two payments, one payment for one year later and the other for two years later. Assume that the asset pays you $8,000 (sure amount) one year later, but two years later cither $6,000 with the probability of 1/2 or $4,000 with the probability of 1/2. Then what would be the fair price of this asset assuming thati=10%? (How much are you willing to pay now for this asset?
Use a calculator to evaluate the amortization formula for the values of the variables P, r, and t (respectively). Assume n = 12. (Round your answer to the nearest cent.) $150,000; 9%; 25 yr
You are evaluating five different investments, all of which involve an upfront outlay of cash. Each investment will provide a single cash payment back to you in the future. Details of each investment appears here:. Calculate the IRR of each investment. State your answer to the nearest basis point (i.e., the nearest 1/100th of 1%, such as 3.76%). The yield for investment A is %. (Round to two decimal places.) Initial Future Investment Investment Value Im A $1,900 $4,029 B $9,600 $13,121 C $500 D $3,200 E $5,900 Data table $1,759 $4,139 $9,079 End of Year 11 9 18 3 12 I X
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4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $19,000 in 14 years will have a higher price today? The security that earns an interest rate of 7.00%. The security that earns an interest rate of 10.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price? An investment that matures in five years An investment that matures in six years Which of the following is true about present value calculations? Other things remaining equal, the present value of a…
In a few sentences, answer the following question as completely as you can. The notion that money has time value is based on the existence of a non–zero opportunity rate (i.e., a rate of return at which it is possible to invest). Why is the opportunity rate so important? Construct an example that shows, with an opportunity rate of 0%, that the value of $1 received today will be $1 in the future.

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