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Explanation: To find the FV of a lump sum, we use: FV = PV(1 + r) t FV = $2,050(1.12) 12 = $7,986.75 FV = $8,352(1.10) 6 = $14,796.08 FV = $72,355(1.11) 13 = $280,974.74 FV = $179,796(1.07) 7 = $288,713.09 Question 1

Week 2 Homework Review

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Page 1: Week 2 Homework Review

Explanation: To find the FV of a lump sum, we use:

FV = PV(1 + r)t

FV = $2,050(1.12)12 = $7,986.75 FV = $8,352(1.10)6 = $14,796.08 FV = $72,355(1.11)13 = $280,974.74 FV = $179,796(1.07)7 = $288,713.09

Question 1

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Question 1

Calculator solutions

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Answer: Sole Proprietorship

Question 2

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Question 2

Calculator solutions

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Imprudential, Inc. has an unfunded pension liability of $569 million that must be paid in 25 years. To assess the value of the firm’s 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 3

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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 4

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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

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Question 6

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

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Question 7

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Question 8

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Question 9

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Question 10

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Question 10

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Question 10