END OF CHAPTER PROBLEMS Chapter 6 Chapter 5

END OF CHAPTER PROBLEMS Chapter 6

Chapter 5 - Summary of Key Equations:

6. 1: Dynamics Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $22, 500 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment?

6. 2: Cecelia Thomas is a sales executive at a Baltimore firm. She is 25 years old and plans to invest $3, 000 every year in an IRA account, beginning at the end of this year until she turns 65 years old. If the IRA investment will earn 9. 75 percent annually, how much will she have in 40 years when she turns 65 years old?

6. 3: The Elkridge Grill has a seven-year loan of $23, 500 with Bank of America. It plans to repay the loan in seven equal installments starting today. If the rate of interest is 8. 4 percent, how much will each payment be?

Each payment made by Elkridge Grill will be $4, 221. 07, starting today.

6. 4: Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments of $10, 000 a year forever, starting when he retires. If he can earn 6. 5 percent annually, how much does your grandfather need to invest to produce the desired cash flow?

6. 5: Cyclone Rentals borrowed $15, 550 from a bank for three years. If the quoted rate (APR) is 6. 75 percent, and the compounding is daily, what is the effective annual rate (EAR)?

6. 6: Modern Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility they are evaluating is to take over a station located at a site that has been leased from the county. The lease, originally for 99 years, currently has 73 years before expiration. The gas station generated a net cash flow of $92, 500 last year, and the current owners expect an annual growth rate of 6. 3 percent. If Modern Energy uses a discount rate of 14. 5 percent to evaluate such businesses, what is the present value of this growing annuity?