KeyToCh4HWEdition5

# KeyToCh4HWEdition5 - payment on the lease is due immediately it is less expensive to buy the truck than to lease it 49 If you live forever you will

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Solutions to Chapter 4 Homework 23. a. PV = 100 × annuity factor(6%, 3 periods) = 100 × 30 . 267 \$ ) 06 . 1 ( 06 . 0 1 06 . 0 1 3 = - b. If the payment stream is deferred by an additional year, then each payment is discounted by an additional factor of 1.06. Therefore, the present value is reduced by a factor of 1.06 to: \$267.30/1.06 = \$252.17 31. PV of an annuity due = PV of ordinary annuity × (1 + r) (See problem 27 for a discussion of the value of an ordinary annuity versus an annuity due.) Therefore, with immediate payment, the value of the lease payments increases from \$38,132.32 (as shown in the previous problem) to: \$38,132.32 × 1.07 = \$40,801.58 Since this is greater than \$40,000 (the cost of buying a truck), we conclude that, if the first
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Unformatted text preview: payment on the lease is due immediately, it is less expensive to buy the truck than to lease it. 49. If you live forever, you will receive a \$100 perpetuity that has present value equal to: \$100/r Therefore: \$100/r = \$2500 ⇒ r = 4 percent 52. PV of cash flows = (\$120,000/1.12) + (\$180,000/1.12 2 ) + (\$300,000/1.12 3 ) = \$464,171.83 This exceeds the cost of the factory, so the investment is attractive. 68. a.PV = \$100/(1.08) 3 = \$79.38 b. real value = \$100/(1.03) 3 = \$91.51 c.real interest rate = 1 rate inflation 1 rate interest nominal 1-+ + = 0.04854 = 4.854% 4-1...
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## This note was uploaded on 10/28/2010 for the course FIN 3300 taught by Professor Jerry during the Winter '10 term at CSU East Bay.

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