Suppose you just bought an annuity with 11 annual payments of $16,100 at the current interest rate of 12.75 percent per year. a.
What is the value of the investment at the current interest rate of 12.75 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What happens to the value of your investment if interest rates suddenly drop to 7.75 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What happens to the value of your investment if interest rates suddenly rise to 17.75 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
1 answer:
Answer and Explanation:
a. The value of the investment is shown below:
Given that,
Future value = $0
Rate of interest = 12.75%
NPER = 11 years
PMT = $16,100
The formula is shown below:
= -PV(Rate;NPER;PMT;FV;type)
So, after applying the above formula, the present value is $92,543.17
b. If the interest rate drop to 7.75%, so the present value is $116,344.48
c. If the interest rate rise to 17.75% so the present value is $75,670.82
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Answer:
The incremental benefit cost ratio is less than 1 therefore we must select site 1.
Explanation:
The incremental BCR can be determined using the following formula
8% , 10)
⇒
⇒ 8%, 20)
⇒
⇒ = $203,704.42
Incremental initial investment = 203,704.42 - 149,029.49
= $ 54,674.93
Incremental benefits = 580,000 - 520,000 = 60,000
Incremental O&M = 75,000 - 80,000 = - $ 5000
Incremental Disbenefits = 140,000 - 90,000 =$ 50,000
All solving using the present worth method also incremental benefit cost ratio comes out to be 0.2743.
The incremental benefit cost ratio is less than 1 therefore we must select site 1.