Question

A. Ed Sloan wants to withdraw $25,000 (including principal) from an investment fund at the end of each year for five years. Compute his required initial investment at the beginning of the first year if the fund earns 8% compounded annually? HINT - Think of this as a standard ordinary annuity. B. The market price of a $800,000, ten-year, 8% (pays interest annually) bond issue sold to yield an effective rate (i.e. market rate) of 10% is: C. Elston Company has entered into a lease agreement for office equipment which could be purchased for $39,927. Elston Company has, however, chosen to lease the equipment for $10,000 per year, payable at the end of each of the next 5 years. Calculate the implied interest rate for the lease payments.

Answer 1

A- 99,817.75 dollars

B-701,686.93 dollars

C- implicit interest rate 8%

Step-by-step explanation:

A.- we need to calculate the present value of an annuity of 25,000 for 5 years discounted at 8%:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 25,000

time 5

rate 0.08

`25000 * (1-(1+0.08)^(-5) )/(0.08) = PV\\`

PV 99,817.7509

B.- we discount the coupon payment and maturity at 10% market rate

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

Coupon payment: 800,000 x 8%= 64,000

time: 10 years

rate 10% = 0.1

`64000 * (1-(1+0.1)^(-10) )/(0.1) = PV\\`

PV $393,252.2948

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 800,000.00

time 10 years

rate 0.1

`(800000)/((1 + 0.1)^(10) ) = PV`

PV 308,434.63

PV copupon payment: $393,252.2948

PV maturity: $308,434.6315

Total $701,686.9263

C we solve for the IRR using the excel IRR function:

we list the cashflows of the lease:

year 0 39,927

year 1 -10,000

year 2 -10,000

year 3 -10,000

year 4 -10,000

year 5 -10,000

we write: =IRR( and select the cell on which we list the cash flow and press enter

IRR = 0.08 = 8%