Exam 6: Discounted Cash Flow Valuation

Southern Tours is considering acquiring Holiday Vacations.Management believes Holiday Vacations can generate cash flows of $187,000,$220,000,and $245,000 over the next three years,respectively.After that time,they feel the business will be worthless.Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition.What is Southern Tours willing to pay today to acquire Holiday Vacations?

What is the effective annual rate of 5.25 percent compounded continuously?

The present value of the following cash flow stream is $5,933.86 when discounted at 11 percent annually.What is the value of the missing cash flow?

Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica.The package requires that you pay $20,000 today,$35,000 one year from today,and a final payment of $45,000 on the day you depart three years from today.What is the cost of this vacation in today's dollars if the discount rate is 9.75 percent?

On this date last year,you borrowed $3,400.You have to repay the loan principal plus all of the interest six years from today.The payment that is required at that time is $6,000.What is the interest rate on this loan?

You just received an insurance settlement offer related to an accident you had six years ago.The offer gives you a choice of one of the following three offers: You can earn 7.5 percent on your investments.You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period.Which one of the following statements is correct given this information?

Your credit card company charges you 1.65 percent interest per month.What is the annual percentage rate on your account?

You are considering changing jobs.Your goal is to work for three years and then return to school full-time in pursuit of an advanced degree.A potential employer just offered you an annual salary of $41,000,$43,000,and $46,000 a year for the next three years,respectively.All salary payments are made as lump sum payments at the end of each year.The offer also includes a starting bonus of $3,000 payable immediately.What is this offer worth to you today at a discount rate of 6.75 percent?

Your grandmother is gifting you $125 a month for four years while you attend college to earn your bachelor's degree.At a 6.5 percent discount rate,what are these payments worth to you on the day you enter college?

Which one of the following statements related to annuities and perpetuities is correct?

Consider a firm with a contract to sell an asset 3 years from now for $90,000.The asset costs $71,000 to produce today.At what rate will the firm just break even on this contract?

Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?

The government has imposed a fine on the Corner Tavern.The fine calls for annual payments of $125,000,$100,000,$75,000,and $50,000,respectively,over the next four years.The first payment is due one year from today.The government plans to invest the funds until the final payment is collected and then donate the entire amount,including the investment earnings,to help the local community shelter.The government will earn 5.5 percent on the funds held.How much will the community shelter receive four years from today?

Your grandfather left you an inheritance that will provide an annual income for the next 10 years.You will receive the first payment one year from now in the amount of $3,000.Every year after that,the payment amount will increase by 6 percent.What is your inheritance worth to you today if you can earn 9.5 percent on your investments?

You are considering two loans.The terms of the two loans are equivalent with the exception of the interest rates.Loan A offers a rate of 7.75 percent,compounded daily.Loan B offers a rate of 8 percent,compounded semi-annually.Which loan should you select and why?

Which one of the following statements concerning interest rates is correct?

Your credit card company quotes you a rate of 17.9 percent.Interest is billed monthly.What is the actual rate of interest you are paying?

You just paid $750,000 for an annuity that will pay you and your heirs $42,000 a year forever.What rate of return are you earning on this policy?

Holiday Tours (HT)has an employment contract with its newly hired CEO.The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service.HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds.How much must HT set aside each year for this purpose?

Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years.His holdings are now worth $598,100.What is his annual rate of return on this stock?