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Chapter 4: Q17BP (page 283)
The Clearinghouse Sweepstakes has just informed you that you have won \(1 million. The amount is to be paid out at the rate of \)20,000 a year for the next 50 years. With a discount rate of 10 percent, what is the present value of your winnings?
The present value is $198,296.29.
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Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point in time as described next:
Real rate of return ........................ 8%
Inflation premium ......................... 3
Risk premium .............................. 4
Total return ............................... 15%
Assume that 10 years later, due to bad publicity, the risk premium is now 7 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond.
Your grandfather has offered you a choice of one of the three following alternatives: \(7,500 now; \)2,200 a year for nine years; or $31,000 at the end of nine years. Assuming you could earn 10 percent annually, which alternative should you choose? If you could earn 11 percent annually, would you still choose the same alternative?
If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?
Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 16 percent. Either method will require an initial capital outlay of \(75,000. The inflows from projected business over the next five years are shown next. Which method should be selected using net present value analysis?
Year Method 1 Method 2
1 .................................... \)18,000 $20,000
2 .................................... 24,000 25,000
3 .................................... 34,000 35,000
4 .................................... 26,000 28,000
5 .................................... 14,000 15,00
Question: Assume $65,000 is going to be invested in each of the following assets. Using Tables 12-11 and 12-12, indicate the dollar amount of the first year鈥檚 depreciation
a. Office furniture.
b. Automobile.
c. Electric and gas utility property.
d. Sewage treatment plant.
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