edf40wrjww2CF_PaperMaster:Desc
9-17 Present Value
Jack Hammer invests in a stock that will pay dividends of $2.00 at the end of
the first year; $2.20 at the end of the second year; and $2.40 at the end of the
third year. Also, he believes that at the end of the third year he will be able to
sell the stock for $33. What is the present value of all future benefits if a
discount rate of 11 percent is applied? (Round all values to two places to the
right of the decimal point.)
Answer:
The following formula to calculate the present values:
PV = FV/(1+r)^t
where FV is the cash flow,
discount rate r = 11%
t = year
year Cash flow PV
1 2 1.80
2 2.2 1.79
3 35.4 25.88
Total PV 29.47
Thus, the PV of total benefit is $29.47
9-22 Alternative present values
Your rich godfather has offered you a choice of one of the three following
alternatives: $10,000 now; $2,000 a year for eight years; or $24,000 at the end
of eight years. Assuming you could earn 11 percent annually, which alternative
should you choose? If you could earn 12 percent annually, would you still
choose the same alternative?
Answer:
Option 1
$10,000 now with a 11% interest.
$10,000 x 11% = $11,100(10,000 + 1,100)
1,100 x 8 yrs = $8,800 + $10,000 = $18,800
$10,000 now with a 12% interest.
$10,000 x 12% = $11,200 (10,000 + 1,200)
1,200 x 8 yrs = $ 9,600 + 10,000 = $19,600
Option 2
$2,000 a year for eight years.
$2,000 x 11% = $2,220
$2,220 x 8 Years = $17,760
$2,000 x 12% = $2,240
$2,240 x 8 Years = $17,920
Option 3
$24,000 at the end of eight years.
Choice: Option 3. The r ...