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General Mills

1. General Mills will receive $27,500 a year for the next 10 years as a payment for a weapon he invented. If a 12 percent rate is applied, should he be willing to sell out his future rights now for $160,000?

2. Determine the amount of money in a saving account at the end of five years, given an initial deposit of $3, 000 and an 8 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly.

3.Kelly Greene has a contract in which she will receive the following payments for the next five years: $3,000, $4,000, $5,000, $6,000, and $7,000. She will then receive an annuity of $9,000 a year from the end of sixth through the end of the 15th year. The appropriate discount rate is 13 percent. If she is offered $40,000 to cancel the contract, should she do it?

4. Kay Mart has purchased an annuity to begin payment at the end of 2009 (the date of the first payment). Assume it is now the beginning of 2007. The annuity is for $12,000 per year and is designed to last eight years.
If the discount rate for the calculation is 11 percent, what is the most she should have paid for the annuity?

5. If you borrow $9,725 and are required to pay back the loan in five equal annual installments of $2,500, what is the interest rate associated with the loan?

Solution Preview

1. General Mills will receive $27,500 a year for the next 10 years as a payment for a weapon he invented. If a 12 percent rate is applied, should he be willing to sell out his future rights now for $160,000?

PVA = W x 1 - 1 where PVA is the present value
(1 + i)n W is the amount received each quarter
i i is the interest rate
n is the period

PVA = 27,500 x 1 - 1
(1 + 0.12)10
0.12

PVA = 155,381.13

He should be willing to sell out his future rights now for $160,000 because it is higher than the present value of all payment received in the next 10 years.

2. Determine ...

Solution Summary

This solution is comprised of a detailed explanation to answer if a 12 percent rate is applied, should he be willing to sell out his future rights now for $160,000.

$2.19