FIN 601: Principles of Finance Activity - Car Price & Lottery Solution

This document provides a detailed solution to a Principles of Finance (FIN 601) activity. The assignment focuses on applying financial concepts to real-world scenarios. The solution calculates the future price of a car considering different inflation rates (2% and 4% per year) over a five-year period. It also determines the present value of a lottery payout of $1,000,000 received in 10 years, considering various discount rates (6%, 9%, and 12%). Furthermore, the solution calculates the present value of an annuity with a payment of $12,000 per year for 25 years at a 9% interest rate. The document includes step-by-step calculations and explanations to illustrate the application of present value, future value, and annuity formulas.

PRINCIPLES OF FINANCE

Table of Contents
1........................................................................................................................................................3
a. ..................................................................................................................................................3
b....................................................................................................................................................3
c....................................................................................................................................................3
2........................................................................................................................................................4
a....................................................................................................................................................4
b....................................................................................................................................................4
c....................................................................................................................................................5
3........................................................................................................................................................5

1.
a.
Price of car after five years in case of 2% per
year inflation
Particulars Amount
Present value of car 14000
1/(1+0.2)^5 0.40
value of car at end of 5 years 5626.29
Price of car after five years in case of 4% per
year inflation
Particulars Amount
Present value of car 14000
1/(1+0.4)^5 0.19
value of car at end of 5 years 2603.08
b.
In case of 4%
Particulars Amount
Future value 14000*(1.104) 15456
In case of 2%
Particulars Amount
Future value 14000*(1.217) 17038
Particulars Amount
At 2% 17038

At 4% 15456
Cost of car 1582
c.
Price of the car in case rate of inflation for 2
years is 2%
Particulars Amount
Present value of car 14000
1/(1+0.2)^2 0.69
value of car 9722.22
Price of the car in case rate of inflation for 3
years is 4%
Present value of car 14000
1/(1+0.4)^3 0.36
value of car 5102.04
2.
a.
In case of 6%
Particulars Formula Amount
Present value 1000000
(1+0.6)^-10 0.56
Present value 1000000*0.56 558394.78
In case of 9%
Particulars Formula Amount

Present value 1000000
(1+0.9)^-10 0.42
Present value 1000000*0.42 422410.81
In case of 12%
Particulars Formula Amount
Present value 1000000
(1+0.12)^-10 0.32
Present value 1000000*0.32 321973.2
b.
In case of 6%
Particulars Formula Amount
Present value 1000000
(1+0.6)^-15 0.42
Present value 1000000*0.56 417265.06
In case of 9%
Particulars Formula Amount
Present value 1000000
(1+0.9)^-15 0.27
Present value 1000000*0.27 274538.04
In case of 12%
Particulars Formula Amount
Present value 1000000

(1+0.12)^-15 0.18
Present value 1000000*0.18 182696.3
c.
As from the evaluation it has been seen that with an increase in return rate, present value
is becoming smaller. Such decrease is arising from higher level of opportunity cost attached to
higher rate. Moreover, longer time till payment of lottery is collected, less is the present value
because of greater time over an opportunity cost applies.
3.
Annuity 12000
Rate 9.00%
Years 25
PVA A * 1-[1/(1+r)^n]/r
0.1159678356
0.8840321644
PVA 117870.955259382

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