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I have the answer, but just can't find out how to get it. Here's the problem:
A local bank advertises the following dea: "Pay us $100 a year for 10 years and then we will pay you (or your beneficiaries) $100 a year forever." Is this a good deal if the interest rate available on other deposits is 6 percent? The solution says: The present value of your payments is $671. The present value of your receipts is $579. This is a bad deal. But now matter how I do the problem, I can't find out how to get 671 or 579. This is using a business calculator, that lets me plug in year/interest rate/future value etc. and compute for present value, or whatever factor I'm looking for. I guess I'm just not pluggging in the right numbers. |
Meh. Lemme blow the dust off my old textbook. I'll get back to you.
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I had someone else look it over, I think the book answer is wrong, but I'm not positive either way.
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Seems like the present value of your payments would be $736.01 which is straight from the present value annuity tables.
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Originally Posted by 1988RedT2' post='828187' date='Jul 12 2006, 02:26 PM
Seems like the present value of your payments would be $736.01 which is straight from the present value annuity tables. |
Originally Posted by treceb' post='828189' date='Jul 12 2006, 01:33 PM
but youll have to take into consideration when the book was written for "present value annuity table", no? Well, no. If you take 100 a year for 10 years at 6% it's always gonna be $736.01. It may not be enough to buy a loaf of bread, but the number will always be the same. |
well 6% is what the other deposits give you, not what youll get from this deposit in particular. so, if 6% is 736, and this deposit only gives you 671, then its a bad deal.
lol. i have no clue what you guys are talking about. |
Here's what the teacher sent to us:
(1) We will receive a perpetuity in the future, which requires us to determine the value on the date that it begins. The present value of approx $1666 is the first step in solving this problem. (value of a perpetuity is cash over rate, 100/.06) (2) What is that $1666 worth today – years before it begins – since we know that the money won’t get there by itself (we’ll be paying into it for a number of years instead of making a lump sum payment like we did in problem #34). (3) Now compare (2) to the present value of the payments that we are required to make in order to collect that perpetuity. Because instead of investing in the annuity, we could use that money to invest elsewhere. It’s an investment choice. If the result is higher or lower than (2), then we have either made a good investment choice or a bad one. |
Originally Posted by Baldy' post='828197' date='Jul 12 2006, 11:57 AM
Here's what the teacher sent to us: (1) We will receive a perpetuity in the future, which requires us to determine the value on the date that it begins. The present value of approx $1666 is the first step in solving this problem. (value of a perpetuity is cash over rate, 100/.06) (2) What is that $1666 worth today – years before it begins – since we know that the money won’t get there by itself (we’ll be paying into it for a number of years instead of making a lump sum payment like we did in problem #34). (3) Now compare (2) to the present value of the payments that we are required to make in order to collect that perpetuity. Because instead of investing in the annuity, we could use that money to invest elsewhere. It’s an investment choice. If the result is higher or lower than (2), then we have either made a good investment choice or a bad one. If I'm reading this correctly then 2 - is findig PV using Rate 6%, Nper 10, FV -1666 -- using the assumption of 10 years at six percent from above if it is differnt then substitue those numbers in this = 930 then 3 - is finding the PV using Rate 6%, Nper 10, Pmt -100 (using same assumptions change if necessary) this = 736 so under these circumstances option 2 is better because it is worth more today. -- Your first problem was a little confusing I aggree with 1988RedT2 the PV would be 736.01 not sure about PV of receipts how they came to that number because if you only pay in for ten years and receive money back infinetly then that seems a little obvious that would be better so there has to be a period missing or something... an infinete money source seems way better than 100 for ten years... |
Originally Posted by Amy' post='828203' date='Jul 12 2006, 03:28 PM
If I'm reading this correctly then 2 - is findig PV using Rate 6%, Nper 10, FV -1666 -- using the assumption of 10 years at six percent from above if it is differnt then substitue those numbers in this = 930 then 3 - is finding the PV using Rate 6%, Nper 10, Pmt -100 (using same assumptions change if necessary) this = 736 so under these circumstances option 2 is better because it is worth more today. -- Your first problem was a little confusing I aggree with 1988RedT2 the PV would be 736.01 not sure about PV of receipts how they came to that number because if you only pay in for ten years and receive money back infinetly then that seems a little obvious that would be better so there has to be a period missing or something... an infinete money source seems way better than 100 for ten years... Well, even the perpetuity has a present value, assuming that you could invest the payments elsewhere at 6%. The perpetuity would be worth 1667 in 10 years, and 930 today. The PV of your payments is 736. Therefore, the perpetuity appears to me to be the better choice. |
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