PROBLEM
1.a.Levinson Corporation wants to accumulate a fund to replace its equipment in 5 years. If it invests $200,000 today at 7%, what amount will it have in 5 years?
b.Assume the same facts as in (a) except that Levinson invests $40,000 per year. What amount will it have in 5 years?
2.Assume that Sanders Co. has promised to make four payments to Johnson, Inc. Each payment is in the amount of $1,000.
Required:
What is the present value of these cash flows if the annual rate is 12%, and the payments begin:
a.one year from today, and are paid annually?
b.six months from today, and are paid semiannually?
c.three months from today, and are paid quarterly?
Which method of payments do you think each company would prefer and why? Carefully show your work and label it clearly.