The Price is Right.

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1. Much to your surprise, you were selected to appear on the TV show, “The Price is Right.” As a result of your prowess in identifying how many roles of toilet paper an average American family keeps on hand, you win the opportunity to choose one of the following: $2,000 today, $10,000 in 10 years, or $31,000 in 29 years. Assuming you can earn 16% on your money, which should you choose? If you are offered $10,000 in ten years and can earn 16% on your money, what is the present value of $10,000?

 

2. What is the future value of $500 a year for nine years compounded annually at 11%? How much will the future value of $900 for nine years compounded annually at 11% be?

 

3. What is the present value of a perpetual stream of cash flows that pays $80,000 at the end of one year and grows at a rate of 7% indefinitely? The rate of interest used to discount the cash flows is 9%. What is the present value of the growing perpetuity?

 

4. What is the present value of a $650 perpetuity discounted back to the present at 12%? What is the present value of the perpetuity?

 

5. How much do you have to deposit today so that beginning 11 years from now, you can withdraw $9,000 a year for the next eight years (periods 11 through 18) plus an additional amount of $18,000 in the last year (period 18)? Assume an interest rate of 8%. What is the amount of money you would need to deposit today?

 
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