Practice: Present and future values for multiple cash flows. Annuities and Perpetuities.

1. Buena Vista Co. has identified an investment project with the following cash flows. If the discount rate is 10%, what is the value of these cash flows today? What is the value today at 18%? At 24%?

Year Cash Flow

1 $720

2 930

3 1,190

4 1,275

2. Investment X offers to pay you $6,000 per year for 9 years, whereas investment Y offers you $8,000 per year for 6 years. Which of these cash flow streams is more attractive (has higher value) if the discount rate is 5%? If the discount rate is 22%?

3. Dundonald Inc. has identified an investment project with the following cash flows. If the discount rate is 8%, what is the future value of these cash flows in year 4? What is the future value at a discount rate of 11%? At 24%?

Year Cash Flow

1 $1,375

2 1,495

3 1,580

4 1,630

4. If you deposit $5,000 at the end of each of the next 20 years into an account paying 10.8% interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?

5. The Sutherland Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever, If the required return on this investment is 5.8%, how much will you pay for the policy?

Answers:

1. 10% $3,188.05

18% $2,659.98

24% $2,348.92

2. 5% $42,646.93 and $40,605.54

22% $22,717.71 and $25,335.34

3. 8% $6,812.27

11% $7,106.28

24% $8,509.52

4. 20 years $313,736.00

40 years $2,753,565.95

5. $517,241.38