200 PART 2 Important Financial Concepts
LG3LG3LG4LG44–25 Perpetuities Consider the data in the following table.Determine, for each of the perpetuities:
a. The appropriate present value interest factor.
b. The present value.4–26 Creating an endowment Upon completion of her introductory finance course,
Marla Lee was so pleased with the amount of useful and interesting knowledge
she gained that she convinced her parents, who were wealthy alums of the
university she was attending, to create an endowment. The endowment is to
allow three needy students to take the introductory finance course each year in
perpetuity. The guaranteed annual cost of tuition and books for the course is
$600 per student. The endowment will be created by making a single payment
to the university. The university expects to earn exactly 6% per year on these
funds.
a. How large an initial single payment must Marla’s parents make to the univer-
sity to fund the endowment?
b. What amount would be needed to fund the endowment if the university
could earn 9% rather than 6% per year on the funds?4–27 Future value of a mixed stream For each of the mixed streams of cash flows
shown in the following table, determine the future value at the end of the final
year if deposits are made into an account paying annual interest of 12%, as-
suming that no withdrawals are made during the period and that the deposits
are made:
a. At the endof each year.
b. At the beginningof each year.4–28 Future value of a single amount versus a mixed stream Gina Vitale has just
contracted to sell a small parcel of land that she inherited a few years ago. The
buyer is willing to pay $24,000 at the closing of the transaction or will pay the
amounts shown in the following table at the beginningof each of the nextCash flow stream
Year A B C1 $ 900 $30,000 $1,200
2 1,000 25,000 1,200
3 1,200 20,000 1,000
4 10,000 1,900
5 5,000Perpetuity Annual amount Discount rateA $ 20,000 8%
B 100,000 10
C 3,000 6
D 60,000 5