Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN: 9781285065137
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 5, Problem 6Q
Summary Introduction
To determine: The
Introduction:
Perpetuity: This refers to the cash flows which occur at fixed regular intervals. These cash flows are of equal values and are for an indefinite period. Perpetuity is also called as the perpetual
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The present value of an ordinary annuity, PAN, is the value today that would be equivalent to the annuity payments (PMT) received at fixed intervals over the annuity period. The
equation is:
Each payment of an annuity due is discounted for one less
(1 + I). The equation is:
PVAN= PMT
1-
(1+1)N
I
period, so the present value of an annuity due is equal to the present value of an ordinary annuity multiplied by
PVA due PVA ordinary (1+1)
One can solve for payments (PMT), periods (N), and interest rates (I) for annuities. The easiest way to solve for these variables is with a financial calculator or a spreadsheet.
Quantitative Problem 1: You plan to deposit $1,700 per year for 5 years into a money market account with an annual return of 2%. You plan to make your first deposit one year
from today.
a. What amount will be in your account at the end of 5 years? Do not round intermediate calculations. Round your answer to the nearest cent.
$
b. Assume that your deposits will begin today. What…
Each payment of an annuity due is compounded for one
compounded for one Select-
-Select-
v period, so the future value of an annuity due is equal to the future value of an ordinary annuity
v period. The equation is:
FVAdue=FVAordinary (1 + I)
The present value of an ordinary annuity, PVAN, is the value today that would be equivalent to the annuity payments (PMT) received at fixed intervals over the annuity
period. The equation is:
1-
(1+1)N
PVAN= PMT
Each payment of an annuity due is discounted for one -Select-
period, so the present value of an annuity due is equal to the present value of an ordinary annuity
multiplied by (1 + I). The equation is:
DVA
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value of a future payment change
as the un
to recelpt is lengthened? As the interest rate increases?
What's the difference between an ordinary annuity and an annuity due? Why would you
prefer to receive an annuity due for $10,000 per year for 10 years than an otherwise
similar ordinary annuity?
iii.
Chapter 5 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Ch. 5 - Prob. 1QCh. 5 - Explain whether the following statement is true or...Ch. 5 - If a firms earnings per share grew from 1 to 2...Ch. 5 - Would you rather have a savings account that pays...Ch. 5 - Prob. 5QCh. 5 - Prob. 6QCh. 5 - Banks and other lenders are required to disclose a...Ch. 5 - Prob. 8QCh. 5 - Prob. 1PCh. 5 - Prob. 2P
Ch. 5 - FINDING THE REQUIRED INTEREST RATE Your parents...Ch. 5 - TIME FOR A LUMP SUM TO DOUBLE If you deposit money...Ch. 5 - TIME TO REACH A FINANCIAL GOAL You have 42,180.53...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - LOAN AMORTIZATION AND EAR You want to buy a car....Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - GROWTH RATES Shalit Corporations 2013 sales were...Ch. 5 - EFFECTIVE RATE OF INTEREST Find the interest rates...Ch. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - EFFECTIVE INTEREST RATE You borrow 85,000; the...Ch. 5 - Prob. 18PCh. 5 - FUTURE VALUE OF AN ANNUITY Your client is 40 years...Ch. 5 - PV OF A CASH FLOW STREAM A rookie quarterback is...Ch. 5 - Prob. 21PCh. 5 - LOAN AMORTIZATION Jan sold her house on December...Ch. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - PV AND LOAN ELIGIBILITY You have saved 4,000 for a...Ch. 5 - EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A...Ch. 5 - NOMINAL INTEREST RATE AND EXTENDING CREDIT As a...Ch. 5 - BUILDING CREDIT COST INTO PRICES Your firm sells...Ch. 5 - Prob. 30PCh. 5 - REQUIRED LUMP SUM PAYMENT Starting next year, you...Ch. 5 - REACHING A FINANCIAL GOAL Six years from today you...Ch. 5 - FV OF UNEVEN CASH FLOW You want to buy a house...Ch. 5 - AMORTIZATION SCHEDULE a. Set up an amortization...Ch. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - Prob. 39PCh. 5 - REQUIRED ANNUITY PAYMENTS A father is now planning...Ch. 5 - Prob. 41SPCh. 5 - Prob. 42IC
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- Perpetuity is a type of annuity which has infinite period of payments. The present value of a perpetuity equals to the annual payment divided by the required rate of return. True or Falsearrow_forwardUsing an annuity, you may calculate the present value of a single payment or a series of payments you will receive. Is this statement correct or incorrect?arrow_forwardwhat would happen if interest rate is doubled in ordinary annuity?arrow_forward
- To find the present value (PV) of an ordinary annuity, a. the interest is compounded and then subtracted from the FV. O b. each payment is divided by (1+1)* c. each payment is multiplied by (1+1). O d. the future value (FV) is divided by the interest rate. e. the future value is divided by (1+1)*:arrow_forward1. How is the future value related to the present value of a single sum? 2. How is the present value of a single sum related to the present value of an annuity? 3. Why does money have a time value? 4. Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow? 5. What is a deferred annuity?arrow_forwardIf you know the present value of an ordinary annuity, how can you find the PV of thecorresponding annuity due?arrow_forward
- Solve the problem. solve using the formula for the future value of an ordinary annuity. given the monthly payment, capital, the annual interest rate, are, and the number of monthly payments, antique, find the future value of the annuity. R=$1300; r = 8.5%; nt= 17 A) $24,398.04 B) $17,548.36 C) $23,397.81 D) $24,198.38 Please search only correct answer as I am | paying for this and I keep receiving incorrect onearrow_forwardAn annuity, and an annuity due, with the same number of payments have the same future value if r = 10%. Which one has the higher payment?arrow_forward(1) What is the value at the end of Year 3 of the following cash flow stream if the quoted interest rate is 10%, compounded semiannually? (2) What is the PV of the same stream? (3) Is the stream an annuity? (4) An important rule is that you should never show a nominal rate on a time line or use it in calculations unless what condition holds? (Hint: Think of annual compounding, when INOM = EFF% = IPER.) What would be wrong with your answers to parts (1) and (2) if you used the nominal rate of 10% rather than the periodic rate, INOM/2 = 10%/2 = 5%?arrow_forward
- Calculate the future value of an annuity, with case A being an ordinary annuity and case B being an annuity due. SEE PIC for NUMBER DETAILSarrow_forwardJust do pat II)arrow_forwardListen The future value of an annuity due is: one period after the final payment. one period before the final payment. at the same point in time as the final payment.arrow_forward
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