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3 years ago

The fair rate is 8%. What is 100 per year, forever, worth now?

Business

2 answers:

iVinArrow [24]3 years ago

7 0

Answer: Please refer to the explanation section

Explanation:

Investment = 100

Interest rate = r = 8%

1. Value of a Perpetual (forever) investment

Present Value = Investment/r = 100/0.08 = 1250

Present Value = $ 1250

2. Present Value with a period of 15 years

Present Value = Investment/(1+r)^n

Present Value = 100/(1+0.08)^15 = 31.524170497

Present Value = $ 31.52

3. Present Value of a Perpetual (forever) investment with Growth rate of 5%

Present Value = Investment/r = 100/0.08 – 0.05 = 3333.333333

Present Value = $ 3333.33

4. Future Value if we get 100 at the end of the year

Future Value = investment(1+r) = 100(1+0.08) = 108

Future Value = $ 108

5. Future Value if we get 100 at the end of 10 years

Future Value = investment(1+r) = 100(1+0.08)^10 = 251.524170497

Future Value = $ 251.52

6. Future Value if 100 is reinvested every year for 10 years

Future Value = Payment x [(1+r)^n – 1)/ r]

Future Value = 100 x [(1+0.08)^10 – 1)/ 0.08)

Future Value = 1448.6562466 = $ 1448.66

777dan777 [17]3 years ago

5 0

Answer:

1. $1,250

2. $855.95

3. $3,333.33

4. $92.59

5. $46.32

6. $671.01

Explanation:

$100 per year forever

Constant Cash flow every year forever is actually a perpetuity its present value is

PV of Perpetuity = Cash flow / rate of return

PV of $100 Perpetuity = $100 / 0.08 = $1,250

$100 per year for 15 years

Constant Cash flow every year for specific time period is actually a Annuity its present value is

PV of annuity = P + P [ ( 1 - ( 1 + r )^-n ) / r ] = $100 + $100 [ ( 1 - ( 1 + 0.08 )^-15 ) / 0.08 ] = $855.95

$100 per year grow at 5% forever

It is a growing perpetuity and its present value will be calculated as follow

Present value of growing perpetuity = Cash flow / Rate of return - growth rate

Present value of growing perpetuity = $100 / 0.08 - 0.05 = $3,333.33

$100 once at the end of this year

Present value = P ( 1 + r)^-n = $100 ( 1 + 0.08 )^-1 = $92.59

$100 once after 10 years

Present value = P ( 1 + r)^-n = $100 ( 1 + 0.08 )^-10 = $46.32

$100 each year for 10 years @ 8%

PV of annuity = P + P [ ( 1 - ( 1 + r )^-n ) / r ] = $100 + $100 [ ( 1 - ( 1 + 0.08 )^-10 ) / 0.08 ] = $671.01

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Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $43,000 per year forever.

evablogger [386]

Answer:

rate = 6.3235%

At a market rate of 6.3235% this will be a fair deal

Explanation:

under perpetuities the principal is never redeem. the investor receive cash payment for an indefinite period of time

This means:

perpetuities present value = C/r

where:

C= annual payment

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680,000 = 43,000/rate

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3 years ago

Taylor Inc. has some material that originally cost $65,500. The material has a scrap value of $56,300 as is, but if reworked at

fgiga [73]

Answer:

-$2,350

Explanation:

In this question, we have to compare the cost which is shown below:

If we considered the reworked cost, then the sales would be

= Sales - reworked cost

= $55,700 - $1,750

= $53,950

And the scrap value is $56,300

So, the financial disadvantage would be

= Sales without reworked cost - scrap value

= $53,950 - $56,300

= -$2,350

All other information which is given is not relevant. Hence, ignored it

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3 years ago

Find the effective rate of interest to the nearest hundredth percent if $60.94 is earned in one year on a deposit of

Nata [24]

Answer:

6.25%

Explanation:

The formula for calculating interest rate is as follows

I= P x R x T

Where

I= interest, P= principal amount, T is time

in this case: I= $60.94, P=$975, T=1 year

Therefore:

$60.94 = $975 x( r/100) x 1

$60.94 =975(r/100) multiply both side by 100 to get rid of the fraction.

6094=975r

r = 6094/ 975

r = 6.2502

interest rate = 6.25%

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3 years ago

MicroTech Corporation maintains a capital structure of 40 percent debt and 60 percent common equity. To finance its capital budg

timama [110]

Answer:

weighted cost of capital for next year is 10.27 %.

Explanation:

Weighted cost of capital = Ke × (E/V) + Kd × (D/V)

Ke = Cost of Equity

= Dividend Yield + Expected growth rate

= $1.30 / $30.00 + 0.07

= 0.11333 or 11.33 %

Kd = Cost of Debt

= Interest × (1 - tax rate)

= 11% × ( 1 - 0.21)

= 8.69 %

Weighted cost of capital = 11.33 % × 60% + 8.69 % × 40%

= 10.27 %

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3 years ago

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. (U

Andrew [12]

Answer:

Given that,

Taxable income = $75,000

Interest from an investment = $10,000

Using the U.S tax rate schedule in 2017

(a) Federal tax will he owe = $5,226.25 + 25% × ($75,000 - $37,950)

= $5,226.25 + $9262.5

= $14,488.75

(b) $Average\ Tax\ Rate = \frac{Total\ Tax}{Taxable\ Income}$

$Average\ Tax\ Rate = \frac{14,488.75}{75,000}$

= 19.32%.

(c) $Effective\ Tax\ Rate = \frac{Total\ Tax}{Total\ Income}$

$Effective\ Tax\ Rate = \frac{14,488.75}{75,000 + 10,000}$

= 17.05%

(d) Chuck is currently in the 25 percent tax rate bracket.

His marginal tax rate on increases in income up to $16,900 and deductions from income up to $37,050 is 25 percent.

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3 years ago