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Chapter 4: Q 12BP (page 282)
You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
The investor will have $86,166.31 after 17 years.
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Question: You wish to retire in 14 years, at which time you want to have accumulated enough money to receive an annual annuity of \(17,000 for 19 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money. What annual contributions to the retirement fund will allow you to receive the \)17,000 annuity?
Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $35,000 per year for the next 10 years. a. If Mr. Moore鈥檚 opportunity cost (potential return) is 10 percent, what is the present value of his consulting contract? b. Assuming Mr. Moore will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity?
Katie Pairy Fruits Inc. has a \(1,000 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% x \)1,000 5 \(150 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent.
a. Compute the current price of the bond.
b. Find the present value of 3 percent x \)1,000 (or \(30) for 20 years at 12 percent. The \)30 is assumed to be an annual payment. Add this valueto $1,000.
c. Explain why the answers in parts a and b are basically the same. (There is a slight difference due to rounding in the tables.)
If you owe $35,000 payable at the end of eight years, what amount should your creditor accept in payment immediately if she could earn 13 percent on her money?
The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 11 percent. The project being analyzed is as follows (\(26,000 investment):
Year | Cash flow |
1 | \)12,000 |
2 | 11,000 |
3 | 9,000 |
a. What is the modified internal rate of return? An approximation from Appendix B is adequate. (You do not need to interpolate.)
b. Assume the traditional internal rate of return on the investment is 17.5 percent. Explain why your answer in part a would be lower.
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