Your Uncle has decided to share some of his wealth with you and your sister, Anna....
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Your Uncle has decided to share some of his wealth with you and your sister, Anna. His plan is outlined below. a. The cash flows that you will get i) $2000 each year for five years starting one year from today (i.e. you will receive the first payment at t = 1). ii) The selling price of a painting. You have two options to choose from regarding when to receive the cash from selling the painting. You can either sell the painting one year from today at a price of $6000, or you can wait and sell it 3 years from today at a price of $8,500. b. The cash flows that Anna will get i) $3,000 each year for five years. The first cash flow will occur 3 years from now (i.e. she will receive the first payment at t = 3). ii) Rental income from a property. She has two options to choose from regarding when she receives the cash from rent. She can either take rent of $400 each year for an indefinite time period starting one year from today (i.e. the first cash flow will occur at t = 1), or she can decide to take the rental income in the following way: she will receive the first rent worth $300 one year from today (i.e. t = 1), and after that the rental income will grow each year at a rate of 5% for an indefinite time period. Assume that the yearly interest rate is 10%, and interest is compounded annually. a. Are you better off by selling the painting one year from today or three years from today? Points: 2 b. Is Anna better off by receiving $400 rental income each year, or by receiving $300 first after which the rental income will grow? Points: 4 c. To whom your uncle is more generous, you or Anna? Points: 4 Your Uncle has decided to share some of his wealth with you and your sister, Anna. His plan is outlined below. a. The cash flows that you will get i) $2000 each year for five years starting one year from today (i.e. you will receive the first payment at t = 1). ii) The selling price of a painting. You have two options to choose from regarding when to receive the cash from selling the painting. You can either sell the painting one year from today at a price of $6000, or you can wait and sell it 3 years from today at a price of $8,500. b. The cash flows that Anna will get i) $3,000 each year for five years. The first cash flow will occur 3 years from now (i.e. she will receive the first payment at t = 3). ii) Rental income from a property. She has two options to choose from regarding when she receives the cash from rent. She can either take rent of $400 each year for an indefinite time period starting one year from today (i.e. the first cash flow will occur at t = 1), or she can decide to take the rental income in the following way: she will receive the first rent worth $300 one year from today (i.e. t = 1), and after that the rental income will grow each year at a rate of 5% for an indefinite time period. Assume that the yearly interest rate is 10%, and interest is compounded annually. a. Are you better off by selling the painting one year from today or three years from today? Points: 2 b. Is Anna better off by receiving $400 rental income each year, or by receiving $300 first after which the rental income will grow? Points: 4 c. To whom your uncle is more generous, you or Anna? Points: 4
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Related Book For
Horngrens Financial and Managerial Accounting
ISBN: 978-0133255584
4th Edition
Authors: Tracie L. Nobles, Brenda L. Mattison, Ella Mae Matsumura
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