Question 1

Explanation:
To find the FV of a lump sum, we use:
FV = PV(1 + r)t
FV = $2,050(1.12)12
FV = $8,352(1.10)6
FV = $72,355(1.11)13
FV = $179,796(1.07)7

=
=
=
=

$7,986.75
$14,796.08
$280,974.74
$288,713.09

Question 1
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Question 2

Answer: Sole Proprietorship

Question 2
Calculator solutions

Question 3
Imprudential, Inc. has an unfunded pension liability of $569 million that must be paid in
25 years. To assess the value of the firms stock, financial analysts want to discount this
liability back to the present.
If the relevant discount rate is 6.2 percent, what is the present value of this liability?

To find the PV of a lump sum, we use:

PV = FV / (1 + r)t
PV = $569,000,000 / (1.062)25 = $126,473,444.80

Question 4
Suppose you are committed to owning a $195,000 Ferrari. If you believe your mutual
fund can achieve a 13 percent annual rate of return and you want to buy the car in 10
years on the day you turn 30, how much must you invest today?

To find the PV of a lump sum

we use: PV = FV / (1 + r)t
PV = $195,000 / (1.13)10 = $57,444.73

Question 5

Explanation:
(a) To solve this problem, we must find the PV of each cash flow and add them. To find the PV of a
lump sum, we use:
PV = FV/(1 + r)t
(a)PV@10% = $850/1.10 + $1,030/(1.10^2) + $1,260/(1.10^3) + $1,190/(1.10^4) = $3,383.41
(b) PV = FV/(1 + r)t
PV@19% = $850/1.19 + $1,030/(1.19^2) + $1,260/(1.19^3) + $1,190/(1.19^4) = $2,782.76
(c) PV = FV/(1 + r)t
PV@26% = $850/1.26 + $1,030/(1.26^2) + $1,260/(1.26^3) + $1,190/(1.26^4) = $2,425.40

Question 6

PV = $700/1.1146 + $600/(1.1146)^2 + $1,100/(1.1146)^4 = $1,823.71

Question 7

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Question 10

Question 10

Question 10