6.1 Future value with multiple cash flows: Konerko, Inc.

, expects to earn cash flows of

$13,227, $15,611, $18,970, and $19,114 over the next four years. If the company uses an
8 percent discount rate, what is the future value of these cash flows at the end of year 4?
6.5 Present value with multiple cash flows: Jeremy Fenloch borrowed some money from
his friend and promised to repay him the amounts of $1,225, $1,350, $1,500, $1,600, and
$1,600 over the next five years. If the friend normally discounts investments at 8 percent
annually, how much did Jeremy borrow?
6.8 Present value of an ordinary annuity: Dynamics Telecommunications Corp. has made
an investment in another company that will guarantee it a cash flow of $22,500 each year
for the next five years. If the company uses a discount rate of 15 percent on its
investments, what is the present value of this investment?
6.10 Future value of an ordinary annuity: Cecelia Thomas is a sales executive at a
Baltimore firm. She is 25 years old and plans to invest $3,000 every year in an IRA
account, beginning at the end of this year until she turns 65 years old. If the IRA
investment will earn 9.75 percent annually, how much will she have in 40 years when she
turns 65 years old?
6.12 Computing annuity payment: Kevin Winthrop is saving for an Australian vacation in
three years. He estimates that he will need $5,000 to cover his airfare and all other
expenses for a week-long holiday in Australia. If he can invest his money in an S&P 500
equity index fund that is expected to earn an average return of 10.3 percent over the next
three years, how much will he have to save every year, starting at the end of this year?
6.14 Perpetuity: Your grandfather is retiring at the end of next year. He would like to ensure
that his heirs receive payments of $10,000 a year forever, starting when he retires. If he
can earn 6.5 percent annually, how much does your grandfather need to invest to produce
the desired cash flow?
6.31 Effective annual interest rate: Which of the following investments has the highest
effective annual rate (EAR)
a. A bank CD that pays 8.25% interest quarterly.
b. A bank CD that pays 8.25% monthly.
c. A bank CD that pays 8.45% annually.
d. A bank CD that pays 8.25% semiannually.
e. A bank CD that pays 8% daily (on a 365-day basis).
6.32 Effective annual interest rate: You are considering three alternative investments: (1) a
three-year bank CD paying 7.5 percent interest compounded quarterly; (2) a three-year
bank CD paying 7.3 percent interest compounded monthly; and (3) a three-year bank CD
paying 7.75 percent interest compounded annually. Which investment has the highest
effective annual rate?
6.33 You have been offered the opportunity to invest in a project which is expected to provide
you with the following cash flows: $4,000 in 1 year, $12,000 in 2 years, and $8,000 in 3
years. If the appropriate interest rates are 6 percent for the first year, 8 percent for the
second year, and 12 percent for the third year, what is the present value of these cash
flows?
6.34 Tirade Owens, a professional athlete, currently has a contract that will pay him a large
amount in the first year of his contract and smaller amounts thereafter. He and his agent
have asked the team to restructure the contract. The team, though reluctant, obliged.
Tirade and his agent came up with a counteroffer. What are the present values of each of
the contracts using a 14 percent discount rate? Which of the three contacts has the highest
present value?

Year Current Contract Teams Offer Counteroffer
1 $8,125,000 $4,000,000.00 $5,250,000.00
2 $3,650,000 $3,825,000.00 $7,550,000.00
3 $2,715,000 $3,850,000.00 $3,625,000.00
4 $1,822,250 $3,925,000.00 $2,800,000.00
6.35 Gary Kornig will turn 30 years old next year and wants to retire when his is 65. So far he
has saved (1) $6,950 in an IRA account in which his money is earning 8.3 percent
annually and (2) $5,000 in a money market account in which he is earning 5.25 percent
annually. Gary wants to have $1 million when he retires. Starting next year, he plans to
invest a fixed amount every year until he retires in a mutual fund in which he expects to
earn 9 percent annually. How much will Gary have to invest every year to achieve his
savings goal?
6.40 Trevor Diaz is looking to purchase a Mercedes Benz SL600 Roadster, which has an
invoice price of $121,737 and a total cost of $129,482. Trevor plans to put down $20,000 and
will pay the rest by taking on a 5.75 percent five-year bank loan. What is the monthly payment
on this auto loan?