Kristen Brown

Professor Laura Forbes

Financial Management
June 10, 2014

Problem 9.1: Find the following values for a lump sum assuming annual compounding:
A. The future value of $500 invested at 8 percent for one year.
The answer is going to be $540.
B. The future value of $500 invested at 8 percent for five years.
The answer is going to be $734.66.
C. The present value of $500 to be received in one year when the opportunity cost rate is
8 percent.
The answer is going to be $462.96.
D. The present value is $500 to be received in five years when the opportunity cost rate
is 8 percent
The answer is going to be $340.29.
Problem 9.4: Find the following values assuming a regular, or ordinary, annuity:
A. The present value of $400 per year for ten years at 10 percent.
The answer is going to be $2457.83.
B. The future value of $400 per year for ten years at 10 percent.
The answer is going to be $6374.97.
C. The present value of $200 per year for five years at 5 percent.
The answer is going to be $865.90.
D. The future value of $200 per year for five years at 5 percent.
The answer is going to be $1105.13.
Problem 9.6: Consider the following uneven cash flow stream:
Year Cash Flow
0 $ 0
1 250
2 400
3 500
4 600
5 600

A. What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent?
The answer is going to be $1,716.00
Cash Flow PVIF PV
250 0.909091 227.2727
400 0.826446 330.5785
500 0.751315 375.6574
600 0.683013 409.8081
600 0.620921 372.5528
1716

B. Add an outflow (or cost) of $1,000 at Year 0. What is the present value (or net value) of
the stream?
The answer is going to be $716.00.
1716.00-1000= 716.00


Problem 9.7: Consider another uneven cash flow stream:
Year Cash Flow
0 $2,000
1 2,000
2 0
3 1,500
4 2,500
5 4,000
A. What is the present (Year 0) value of the cash flow stream if the opportunity cost rate is
10 percent?
The answer is going to be $9,136.37.
Cash Flow PVIF PV
2000 1 2000
2000 0.909091 1818.182
0 0.826446 0
1500 0.751315 1126.972
2500 0.683013 1707.534
4000 0.620921 2483.685
9136

B. What is the future (Year 5) value of the cash flow stream if the cash flows are invested in
an account that pays 10 percent annually?
The answer is going to be $14,714.22

Cash Flow FVIF FV
2000 1.61051 3221.02
2000 1.4641 2928.2
0 1.331 0
1500 1.21 1815
2500 1.1 2750
4000 1 4000
14714


Problem 9.9: Assume that you just won $35 million in the Florida lottery, and hence the state
will pay you 20 annual payments of $1.75 million each beginning immediately. If the rate of
return on securities of similar risk to the lottery earnings (e.g. the rate of 20-year U.S. Treasury
Bonds) is 6 percent, what is the present value of your winnings?
The answer is going to be $21.28 million.
1.75*12.1581=21.24