15. More on the time value of money Lloyd is a divorce attorney who practices law in Florida. He wants to join the American Divorce Lawyers Association (ADLA), a professional organization for divorce attorneys. The membership dues for the ADLA are $550 per year and must be paid at the beginning of each year. For instance, membership dues for the first year are paid today, and dues for the second year are payable one year from today. However, the ADLA also has an option for members to buy a lifetime membership today for $5,000 and never have to pay annual membership dues. Obviously, the lifetime membership isn't a good deal if you only remain a member for a couple of years, but if you remain a member for 40 years, it's a great deal. Suppose that the appropriate annual interest rate is 7.5%. What is the minimum number of years that Lloyd must remain a member of the ADLA so that the lifetime membership is cheaper (on a present value basis) than paying $550 in annual membership dues? (Note: Round your answer up to the nearest year.) O21 years O 18 years O 12 years O 14 years In 1626, Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe. Historians estimate that the price he paid for the island was about $24 worth of goods, including beads, trinkets, cloth, kettles, and axe heads. Many people find it laughable that Manhattan Island would be sold for $24, but you need to consider the future value (FV) of that price in more current times. If the $24 purchase price could have been invested at a 5.25% annual interest rate, what is its value as of 2018 (392 years later)? O $14,189,727,295.93 O $16,287,339,157.07 O $10,488,059,305.69 O $12,338,893,300.81
15. More on the time value of money Lloyd is a divorce attorney who practices law in Florida. He wants to join the American Divorce Lawyers Association (ADLA), a professional organization for divorce attorneys. The membership dues for the ADLA are $550 per year and must be paid at the beginning of each year. For instance, membership dues for the first year are paid today, and dues for the second year are payable one year from today. However, the ADLA also has an option for members to buy a lifetime membership today for $5,000 and never have to pay annual membership dues. Obviously, the lifetime membership isn't a good deal if you only remain a member for a couple of years, but if you remain a member for 40 years, it's a great deal. Suppose that the appropriate annual interest rate is 7.5%. What is the minimum number of years that Lloyd must remain a member of the ADLA so that the lifetime membership is cheaper (on a present value basis) than paying $550 in annual membership dues? (Note: Round your answer up to the nearest year.) O21 years O 18 years O 12 years O 14 years In 1626, Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe. Historians estimate that the price he paid for the island was about $24 worth of goods, including beads, trinkets, cloth, kettles, and axe heads. Many people find it laughable that Manhattan Island would be sold for $24, but you need to consider the future value (FV) of that price in more current times. If the $24 purchase price could have been invested at a 5.25% annual interest rate, what is its value as of 2018 (392 years later)? O $14,189,727,295.93 O $16,287,339,157.07 O $10,488,059,305.69 O $12,338,893,300.81
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter4: Time Value Of Money
Section: Chapter Questions
Problem 12MC: (1) What is the value at the end of Year 3 of the following cash flow stream if the quoted interest...
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Question
Solve both of these practice problems
Transcribed Image Text:12. Nonannual compounding period
The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future
values of cash flows.
An investor can invest money with a particular bank and earn a stated interest rate of 4.40%; however, interest will be compounded quarterly. What
are the nominal, periodic, and effective interest rates for this investment opportunity?
Interest Rates
Nominal rate
Periodic rate
Effective annual rate
Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer. He particularly
likes his local bank because he is being offered a nominal rate of 4%. But the bank is compounding bimonthly (every two months). What is the
effective interest rate that Rahul would pay for the loan?
4.250%
3.926%
O 4.067%
O 4.381%
Another bank is also offering favorable terms, so Rahul decides to take a loan of $12,000 from this bank. He signs the loan contract at 5%
compounded daily for 12 months. Based on a 365-day year, what is the total amount that Rahul owes the bank at the end of the loan's term? (Hint:
To calculate the number of days, divide the number of months by 12 and multiply by 365.)
O $13,119.82
O $12,236.75
4.40%
1.10% ▼
4.47%
O $12,615.21
O $13,372.12
Transcribed Image Text:15. More on the time value of money
Lloyd is a divorce attorney who practices law in Florida. He wants to join the American Divorce Lawyers Association (ADLA), a professional organization
for divorce attorneys. The membership dues for the ADLA are $550 per year and must be paid at the beginning of each year. For instance,
membership dues for the first year are paid today, and dues for the second year are payable one year from today. However, the ADLA also has an
option for members to buy a lifetime membership today for $5,000 and never have to pay annual membership dues.
Obviously, the lifetime membership isn't a good deal if you only remain a member for a couple of years, but if you remain a member for 40 years, it's
a great deal. Suppose that the appropriate annual interest rate is 7.5%. What is the minimum number of years that Lloyd must remain a member of
the ADLA so that the lifetime membership is cheaper (on a present value basis) than paying $550 in annual membership dues? (Note: Round your
answer up to the nearest year.)
O 21 years
O 18 years
O 12 years
O 14 years
In 1626, Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe. Historians estimate that the price he paid for the
island was about $24 worth of goods, including beads, trinkets, cloth, kettles, and axe heads. Many people find it laughable that Manhattan Island
would be sold for $24, but you need to consider the future value (FV) of that price in more current times. If the $24 purchase price could have been
invested at a 5.25% annual interest rate, what is its value as of 2018 (392 years later)?
O $14,189,727,295.93
O $16,287,339,157.07
O $10,488,059,305.69
O $12,338,893,300.81
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