to the items below.
the following cash inflow at the end of each year, what is the future value of
this cash flow at 6%, 9%, and 15% interest rates at the end of the seventh
Year 1 $15,000
Year 2 $20,000
Year 3 $30,000
Years 4 through
Year 7 $150,000
Part B: County Ranch
Insurance Company wants to offer a guaranteed annuity in units of $500, payable
at the end of each year for 25 years. The company has a strong investment
record and can consistently earn 7% on its investments after taxes. If the
company wants to make 1% on this contract, what price should it set on it? Use
6% as the discount rate. Assume that it is an ordinary annuity and that the
price is the same as present value.
Part C: A local
government is about to run a lottery but doesnot want to be involved in the payoff if a winner picks an annuity
payoff. The government contracts with a trust to pay the lump-sum payout to the
trust and have the trust (probably a local bank) pay the annual payments. The
first winner of the lottery chooses the annuity and will receive $150,000 a
year for the next 25 years. The local government will give the trust $2,000,000
to pay for this annuity. What investment rate must the trust earn to break even
on this arrangement?
Part D: Your dreams of
becoming rich have just come true. You have won the State of Tranquility’s
Lottery. The State offers you two payment plans for the $5,000,000 advertised
jackpot. You can take annual payments of $250,000 for the next 20 years or
your investment rate over the next 20 years is 8%, which payoff will you
your investment rate over the next 20 years is 5%, which payoff will you
what investment rate will the annuity stream of $250,000 be the same as the
lump sum payment of $2,867,480?