Question

Exercise n3: present value of an annuity You are given three investment alternatives to analyze. The cas from these three investments are as follows YEAR INVESTA 1 10000 2 10000 3 10000 4 10000 5 10000 INVESTB INVESTC 1000 10000 5000 10000 10000 10000 10000 10000 Assuming a 5% interest rate (discount rate), find the present va .t=0) of each investment xercise n°4 : Effective annual rate ou want to borrow $1,000 from a friend for one year, and you pose to pay her $1,120 at the end of the year. She agrees to le $1,000, but she wants you to pay her $10 of interest at the ei 7 of the first 11 months plus $1,010 at the end of the 1?" much higher is the effective no.1

Answer 1

INVESTA

Let Cash Flows in Year n be denoted by CFn
Given,

CF1 = 10000
CF2 = 10000
CF3 = 10000
CF4 = 10000
CF5 = 10000

Interest Rate = r = 0.05
Present Value = PV = ΣCFn/(1+r)^n
= 10000/(1+0.05) + 10000/(1+0.05)^2 + 10000/(1+0.05)^3 + 10000/(1+0.05)^4 + 10000/(1+0.05)^5
= $43294.77

INVESTB

Given,
CF5 = 10000
CF6 = 10000
CF7 = 10000
CF8 = 10000
CF9 = 10000

Interest Rate = r = 0.05
Present Value = PV = ΣCFn/(1+r)^n
= 10000/(1+0.05)^5 + 10000/(1+0.05)^6 + 10000/(1+0.05)^7 + 10000/(1+0.05)^8 + 10000/(1+0.05)^9 + 0/(1+0.05)^10
= $35618.71

INVESTC

Given,

CF1 = 1000
CF5 = 5000
CF9 = 10000

Interest Rate = r = 0.05
Present Value = PV = ΣCFn/(1+r)^n
= 1000/(1+0.05) + 5000/(1+0.05)^5 + 10000/(1+0.05)^9
= $11316.1