Question

What is the present value of 10 equal payments of $22,500 to be made at the end of each year for the next 10 years? The annual interest rate is 10%. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answer to the nearest whole dollar.)
b.

Global Stores is downsizing and must let some employees go. Employees volunteering to leave are being offered a severance package of $120,000 cash, another $131,000 to be paid in one year, and an annuity of $29,500 to be paid each year for seven years with the first payment coming at the end of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answer to nearest whole dollar.)

What is the present value of the total severance package, assuming an annual interest rate of 6%?\

c.

You have just won the state lottery and have two choices for collecting your winnings. You can collect $107,000 today or receive $20,500 at the end of each year for the next seven years. A financial analyst has told you that you can earn 8% on your investments.

Calculate the present value of both the options (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answers to nearest whole dollar.)

d.

An investment will pay $15,000 at the end of each year for eight years and a one-time payment of $150,000 at the end of the eighth year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

Determine the present value of this investment using a 7% annual interest rate. (Round your answer to the nearest whole dollar.)

Answer 1

Answer:

a.

We use the formula for calculating present value of annuity to solve the question as followed:

(22,500/10%) x [ 1 - 1.1^(-10) ] = $138,253.

b.

The present value of the total severance package is calculated as:

120,000 cash paid at the beginning + Present value of $131,000 paid in one year time + Present value of 7 annuities paid at the end of each year starting from the end of this year = 120,000 + 131,000/1.06 + [ 29,500/6% x (1 - 1.06^(-7)) ] = $408,265.

c.

Option 1: to collect lump sum of $107,000 today will give present value of $107,00

Option 2: to collect seven equal $20,500 at the end of each year will give present value as calculated below by applying the present value formula for annuity:

(20,500/8%) x ( 1 - 1.08^-(7)] = $106,731.

d.

The present value of this investment is equal to:

Present value of the annuity made of 8 equal payments at the end of each year, $15,000 each + Present value of $150,000 receipt paid in 8 year time = (15,000/7%) x [1 - 1.07^(-8) ] + 150,000/1.07^(-8) = $176,871.

Explanation: