# Annuity

December 7, 2015

need \$32,000 at the end of 6 years. If you can earn 0.625% per month, how much would you need to invest today to meet your objective?

In January of 1997, the U.S. Consumer Price Index (CPI) stood at 159.1. By January of 2011, the level had risen to 220.2. What was the average annual rate of inflation over this time period as measured by the CPI? Please go out 2 decimal places.

At what interest rate would you be indifferent to a lottery payout today of \$2,229,389.17, or 25 equal annual end-of-the-year payouts of \$200,000? Please go out 2 decimal places.

Willis has won the \$4,700,000 state lottery and intends to save all of the money for his retirement. He chooses to receive an annual cash flow of \$235,000 for twenty years, with the first payment to be received one year from today. How much money will be in his retirement account in twenty years if he can reinvest his money at an annual rate of 6.75%?

Why are there different interest rates on loans and securities? Please provide at least 2 reasons.

You pay down 10% on a home with a purchase price of \$280,000. The bank will loan you the remaining balance of \$252,000 at 8.23% APR. You have an option to make annual payments or monthly payments on the loan. Both options have a 30-year payment schedule.

a) What are the annuity payments under the annual plan?

b) What are the annuity payments under the monthly plan?

c) In terms of the total cash outflows and the effective cost of borrowing, briefly compare both plans.

Jayhawk Corp. is selling for \$30 a share. In looking at the stream of dividends over the past ten years, you find out that the first dividend was \$1.00 and the last dividend was \$2.00. Please go out 2 decimal places.

a) What is its growth rate?

b) What is its expected return?

Winston Co. purchases an asset for \$60,000. This asset qualifies as a seven-year recovery asset under MACRS. Winston has a tax rate of 30%. The seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end of six years for \$10,000, what is the cash flow from disposal?

Labowski’s Long Boards Inc. makes high-quality skateboards for recreational use. It wholesales its boards in groups of 10 for a package price of \$1,500. Many of its customers have asked for credit terms to aid in purchasing the boards. The firm’s finance department has estimated the following profile for its long boards and customer base:

Annual sales: 10,000 long board packages

Annual production costs per board package: \$1,000

Lost sales if credit is not provided for customers: 1,200 long board packages

Default rate if all customers purchase on credit: 4.00%

a) What is the profit margin if the firm has a credit policy?

b) What is the change in the profit margin if the firm moves from a cash-only policy to a credit policy?

c) What is the dollar value of bad debts the firm expects to accumulate over a year?

d) Given the bad-debt dollar amount, what is the maximum average amount per customer that the firm should spend on credit screening

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