Question

(a) For each of the following payment schemes, choose which is better at an interest rate of 5%

Answer 1

Answer:

Explanation:

(a) i. Payment = $7000

For cash flow payment = $750 (Per year at 5%, for 12 years)

= 750*8.863

= $6697.25

This shows it is better to receive $7000 right now.

ii. FV = $10000

PV = FV(P/F, 5%, 10 years)

= 10000*0.6139

= $6139

And Payment of $1000 per year, for 5 years

PV = 1000 (per year at 5%, for 5 years)

= $1000*7.722

= $7722

It is better to get $1000 per year for 5 years

(b)i. PV = $1000

fV = $1402.55

Interest = i

by formula

1000 = 1402.55 (p/f, i, 5)

1000 =$\frac{1402.55}{(1 + i)^{5} }$

$\sqrt[5]{(1 + i)^5}$ = $\sqrt[5]{\frac{1402.55}{1000} }$

1 + i = 1.069

Collect like terms

i = 1.069 - 1

i = 0.069

i ≈ 7%

ii. PV = $166666.67

Perpetuity = 15000

interest is unknown

166666.67 = 15000/i

i = 15000/166666.67

i = 0.089

i ≈ 9%