Real Cash Flows [LO4] When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost about $7. Based on actuarial tables, “Joltin’ Joe” could expect to live for 30 years after the actress died. Assume that the EAR is 7.3 percent. Also, assume that the price of the flowers will increase at 3.7 percent per year, when expressed as an EAR. Assuming that each year has exactly 52 weeks, what is the present value of this commitment? Joe began purchasing flowers the week after Marilyn died.
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Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
- Year 1 Year 2 Year 3 Year 4 Year 5 100000 20000 330000 450000 750000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar? Identify whether the situations described in the following table are examples of uneven cash flows or annuity payments: Debbie has been donating 10% of her salary at the end of every year to charity for the last three years. Her salary increased by 15% every year in the last three years. You deposit a certain equal amount of money every year into your pension fund. Amit receives quarterly dividends from his investment in a high-dividend yield, index exchange–traded fund. Aakash borrowed some money from his friend to start a new business. He promises to pay his friend $2,650 every year for the next five years to pay off his loan along with interest.arrow_forward4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $19,000 in 14 years will have a higher price today? The security that earns an interest rate of 7.00%. The security that earns an interest rate of 10.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price? An investment that matures in five years An investment that matures in six years Which of the following is true about present value calculations? Other things remaining equal, the present value of a…arrow_forward123 Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,550,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…arrow_forward
- BE6.5 (LO 3) Sally Medavoy will invest $8,000 a year for 20 years in a fund that will earn 6% annual interest. If the first payment into the fund occurs today, what amount will be in the fund in 20 years? If the first payment occurs at year-end, what amount will be in the fund in 20 years? BE6.6 (LO 3) Steve Madison needs $250,000 in 10 years. How much must he invest at the end of each year, at 5% interest, to meet his needs? BE6.7 (LO 2) John Fillmore’s lifelong dream is to own his own fishing boat to use in his retirement. He estimates that the boat he wants will cost $300,000 when he retires in 5 years. How much must he invest at an annual rate of 8% (compounded annually) to buy the boat at retirement? BE6.8 (LO 2) Refer to the data in BE6.7. Assuming quarterly compounding of amounts invested at 8%, how much must be invested to have enough at retirement to buy the boat? BE6.9 (LO 3) Morgan Freeman is investing $9,069 at the end of each year in a fund that earns 5% interest. In how…arrow_forwardBrief Exercises BE6.7 (LO2) Jose Garcia's lifelong dream is to own a fishing boat to use in hisretirement. Jose has recently come into an inheritance of $400,000. He estimatesthat the boat he wants will cost $300,000 when he retires in 5 years. How much ofhis inheritance must he invest at an annual rate of 8% compounded annually) tobuy the boat at retirement? BE6.8 (LO2) Refer to the data in BE6.7. Assuming quarterly compounding of amountsinvested at 8%, how much of Jose Garcia's inheritance must be invested to haveenough at retirement to buy the boat?arrow_forwardH5. Anthony and Michelle Constantino just got married and received $37,000 in cash gifts for their wedding. How much will they have on their twenty-fifth anniversary if they place half of this money in a fixed-rate investment earning 6 percent compounded annually? Would the future value be larger or smaller if the compounding period was 6 months? How much more or less would they have earned with this shorter compounding period? If they place half of this money, PV, in a fixed rate investment earning 6 percent compounded annually, the amount they will have, FV, on their twenty-fifth anniversary is $_____ enter your response here. (Round to the nearest cent.) Would the future value be larger or smaller if the compounding period was 6 months? (Select the best choice below.) A. Larger. The greater the number of compounding periods per year, the larger the impact of compound interest, all else equal. B. Smaller. The greater the number of compounding periods per year, the smaller…arrow_forward
- [Geometric Series Gradient]1. A young man has decided to go into business at the age 40. He wishes toaccumulate P200,000.00 at that age. On his twenty-fifth birthday he deposits a certain amount and will increase the deposit by 10% each year until the fortieth year. If the funds can be invested at 9.6% compounded annually, how much should his initial investment be? ANSWER SHOULD BE [P3,074.85]arrow_forward(Related to Checkpoint 5.4) (Present value) Sarah Wiggum would like to make a single investment and have $2.0 million at the time of her retirement in 35 years. She has found a mutual fund that will earn 4 percent annually. How much will Sarah have to invest today? If Sarah earned an annual return of 14 percent, how soon could she then retire? a. If Sarah can earn 4 percent annually for the next 35 years, the amount of money she will have to invest today is $nothing. (Round to the nearest cent.)arrow_forward1. Engr. Johnson started saving ₱2000.00 each year for 25 years until his retirement at 65 years old. A year after he retired, he withdrew ₱10000.00 for a period of 5 years. In the ninth and tenth years, he decided to only withdrew ₱5000.00 per year. In the twelfth year, he withdraws the remaining money in his account. If the interest rate was 9% per year: a) Draw the Cash flow diagram with function symbols. b) What was the final withdrawal from his account?arrow_forward
- A8) Gerry is considering buying a small business that makes t-shirts. He plans on running the business for 17 years before selling it. He expects to make $25,506 each semiannual period for the 17 years that he owns the business with his first $25,506 realized at the end of the first semiannual period. He has also contracted with 3 large events to make t-shirts that will generate cash flows of $17,639, $22,850, and $11,555 in 3 years, 9 years and 13 years respectively. At the end of year 17 he plans to sell the business of $186,090 after collecting the $25,506 in annual revenue. How much should he pay for the business if the interest rate is currently 13.63%arrow_forwardYour father has RM500,000 and wants to retire. He expects to live for another 20 years, and to be able to earn 8% on his invested funds. How much could he withdraw at the end of each of the next 20 years? O a. RM53,431.83 O b. RM55,119.76 O c. RM50,926.10 O d. RM54,764.40 Please answer it by using formula not in excel.arrow_forward7. Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year. Should Sigma purchase this digger if its cost of capital is 12 percent?arrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT