14 Aug Bus650 Managerial Finance
Review the following:
Using your data an alternate computations
Part a –
$30,000 (1/1.07)^12 = $30,000 x .4440 = $13,322 or $30,000 / (1.07)^12 = $30,000/ 2.2522 = $13,320 rounding (part-a)
Part b
Determining the present value of a perpetuity – using your data
PMT x (1 / R) Part (b) Pmt = Present value of Annuity divided by (Future value Interest Factor annuity at r, n)
$500 x (1/.06) = $500 x 16.6667 = $83,334 how large must the endowment be.5
PMT = Present value annuity divided Future value interest factor annuity at 6%, 50 years. (I used the future annuity table)
Pmt = $83,334 / 290.336 = $28.70 for the next 50 years.
Additional question:
You wish to purchase a home in five years from now and estimates that an initial down payment of $20,000 will be required at that time; and you wish to make equal annual end-of year deposits in an account paying annual interest of 4 percent, so what size annuity will result in a lump sum equal to $20,000 at the end of year 5.
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