Managerial Finance I, 4 pages , double spaced
Sourcesmust be cited in APA format. Your response should be four (4) pages in length;refer to the “Assignment Format” page for specific formatrequirements.
Respond to the items below.
PartA
Given the following cash inflow at the endof each year, what is the future value of this cash flow at 6%, 9%, and 15%interest rates at the end of the seventh year?
|
Year 1 |
$15,000 |
|
Year 2 |
$20,000 |
|
Year 3 |
$30,000 |
|
Years 4 through 6 |
$0 |
|
Year 7 |
$150,000 |
PartB
County Ranch Insurance Company wants tooffer a guaranteed annuity in units of $500, payable at the end of each yearfor 25 years. The company has a strong investment record and can consistentlyearn 7% on its investments after taxes. If the company wants to make 1% on thiscontract, what price should it set on it? Use 6% as the discount rate. Assumethat it is an ordinary annuity and the price is the same as present value.
PartC
A local government is about to run alottery but does not want to be involved in the payoff if a winner picks anannuity payoff. The government contracts with a trust to pay the lump-sumpayout to the trust and have the trust (probably a local bank) pay the annualpayments. The first winner of the lottery chooses the annuity and will receive$150,000 a year for the next 25 years. The local government will give the trust$2,000,000 to pay for this annuity. What investment rate must the trust earn tobreak even on this arrangement?
PartD
Your dream of becoming rich has justcome true. You have won the State of Tranquilitys Lottery. The State offersyou two payment plans for the $5 million jackpot. You can take annual paymentsof $250,000 for the next 20 years or $2,867,480 today.
a. If your investment rate over the next 20years is 8%, which payoff will you choose?
b. If your investment rate over the next 20 years is 5%, which payoff will youchoose?
c. At what investment rate will the annuity stream of $250,000 be the same asthe lump sum payment of $2,867,480?
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