The $40 million lottery prize that you have just won actually pays out$2 million a year for 20 years. The interest rate is 8%.
b. What is the present value if the first payment comes immediately?

A lottery claims its grand prize is $10 million, payable over 5 years at$2,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.

A common stock will pay a cash dividend of $4 next year. After that, the dividends are expected to increase indefinitely at 4% per year. If the discount rate is 14%, what is the PV of the stream of dividend payments?

The annually compounded discount rate is 5.5%. You are asked to calculate the present value of a 12-year annuity with payments of $50,000 per year. Calculate PV for each of the following cases.
b. The first payment arrives in six months. Following payments arrive at one-year intervals (i.e., at 18 months, 30 months, etc.).

An investment costs $1,548 and pays$138 in perpetuity. If the interest rate is 9%, what is the NPV?

Find the effective rate of interest corresponding to a nominal rate of 5.5%/year compounded annually, semiannually, quarterly, and monthly.

You are contemplating membership in the St. Swithin’s and Ancient Golf Club. The annual membership fee for the coming year is $5,000, but you can make a single payment today of$12,750, which will provide you with membership for the next three years. Suppose that the annual fee is payable at the end of each year and is expected to increase by 6% a year. The discount rate is 10%. Which is the better deal?

Basset is 65 years of age and has a life expectancy of 12 more years. He wishes to invest $20,000 in an annuity that will make a level payment at the end of each year until his death. If the interest rate is 8%, what income can Mr. Basset expect to receive each year?

Dear Financial Adviser,
My spouse and I are each 62 and hope to retire in three years. After retirement we will receive $7,500 per month after taxes from our employers’ pension plans and$1,500 per month after taxes from Social Security. Unfortunately our monthly living expenses are $15,000. Our social obligations preclude further economies. We have$1,000,000 invested in a high-grade, tax-free municipal-bond mutual fund. The return on the fund is 3.5% per year. We plan to make annual withdrawals from the mutual fund to cover the difference between our pension and Social Security income and our living expenses. How many years before we run out of money?\

Sincerely,
Luxury Challenged
Marblehead, MA\

You can assume that the withdrawals (one per year) will sit in a checking account (no interest) until spent. The couple will use the account to cover the monthly shortfalls.

The annually compounded discount rate is 5.5%. You are asked to calculate the present value of a 12-year annuity with payments of $50,000 per year. Calculate PV for each of the following cases.
a. The annuity payments arrive at one-year intervals. The first payment arrives one year from now.

Which of the following is not an element of the master budget?

a. The capital expenditures budget.

b. The production schedule.

c. The operating expense budget.

d. All of the above are elements of the master budget.

Siegfried Basset is 65 years of age and has a life expectancy of 12 more years. He wishes to invest $20,000 in an annuity that will make a level payment at the end of each year until his death. If the interest rate is 8%, what income can Mr. Basset expect to receive each year?

You have purchased one lottery ticket each week for many months and have not won more than $5.00. You decide, based on your past experience, that you are not going to win the grand prize and so you stop playing the lottery. What type of reasoning did you use? Explain.

Dear Financial Adviser,

My spouse and I are each 62 and hope to retire in three years. After retirement we will receive $7,500 per month after taxes from our employers' pension plans and$1,500 per month after taxes from Social Security. Unfortunately our monthly living expenses are $15,000. Our social obligations preclude further economies.

We have$1,000,000 invested in a high-grade, tax-free municipal-bond mutual fund. The return on the fund is 3.5% per year. We plan to make annual withdrawals from the mutual fund to cover the difference between our pension and Social Security income and our living expenses. How many years before we run out of money?

Sincerely,

Luxury Challenged

Marblehead, MA

You can assume that the withdrawals (one per year) will sit in a checking account (no interest) until spent. The couple will use the account to cover the monthly shortfalls.