FIN1001 Spring 2009

Answer Key for Time Value of Money I

#1:
a. m=1 N = 10 i=6 PMT = 0 FV = 18000 PV = 10,051.11
b. m=1 N= 5 i = 12 PMT = 0 FV = 20000 PV = 14,753.10
c. m=1 N = 15 i=6 PMT = 0 FV = 26000 PV = 6,304.87
d. m=1 N = 40 i = 20 PMT = 0 FV = 10000 PV = 6.80

#2:
a. m=1 N = 10 i=7 PMT = 0 PV = 10000 FV = 19,671.51
b. m=1 N = 10 i = 12 PMT = 0 PV = 10000 FV = 31,058.48
c. m=1 N = 30 i = 10 PMT = 0 PV = 10000 FV = 174,494.02
d. m = 12 N = 360 i = 10 PMT = 0 PV = 10000 FV = 198,373.99

#3:
a. m=1 N=6 i = 12 PMT = 0 FV = 12000 PV = 6,079.57
b. m=1 N = 15 i=8 PMT = 0 FV = 15000 PV = 4,728.63
c. m=1 N = 10 i=8 PMT = 5000 FV = 0 PV = 33,550.41
d. m=1 N = 40 i=7 PMT = 40000 FV = 0 PV = 533,268.35

#4:
a. m=1 N = 10 i = 10 PMT = 10000 PV = 0 FV = 159,374.25
b. m=1 N = 40 i = 8 PMT = 10000 PV = 0 FV = 2,590,565.19

#5: 8-year Investment: m = 1 N = 8 i = 10 PV = -12000 PMT = 0 FV = 25,723.07

12-year Investment: Use this $25,723.07 as PV to get the FV of 12-year investment at 13%.
m = 1 N = 12 i = 13 PV = -25723.07 PMT = 0 FV = 111,497.24

#6: m=1 N = 15 i=8 PMT = 16000 FV = 0 PV = 136,951.66

#7: m=1 N = 50 i = 15 PMT = 0 FV = 100000 PV = 92.28

#8: Correct approach is to compare PV of the 20-year annuity and $180,000 offer. You choose the
one with a greater amount. If the PV is less than $180,000, then she would be better off by selling
it out for $180,000. If not, she’d better off by keeping it.

PV of her song-right is
m = 1 N = 20 i = 10 PMT = 20000 FV = 0 PV = 170,271.27,
which is less than $180,000. Thus, you’d better sell it at $180,000
#9: PV of the 10-year annuity is
m = 1 N = 10 i = 10 PMT = 30000 FV = 0 PV = 184,337.01,
which is greater than $160,000. Thus, keep it!

#10: m = 1 N = 5 i = 20 PMT = 0 PV = -1000 FV = 2,488.32

m = 1 N = 3 i = 15 PMT = 0 PV = -2488.32 FV = 3,784.42

#11: You use the effect rate of the quarterly compounding APR of 20% for annual interest rate.
m = 1 N = 10 i = 21.55 PMT = 2000 PV = 0 FV = 56,052.22

#12: m=1 i=7 PV = 1 PMT = 0 FV = 2 N = 10.24 years

m=1 i=7 PV = 1 PMT = 0 FV = 3 N = 16.24 years
m=4 i=7 PV = 1 PMT = 0 FV = 2 N = 39.95 quarters
m=4 i=7 PV = 1 PMT = 0 FV = 3 N = 63.33 quarters
m = 12 i=7 PV = 1 PMT = 0 FV = 2 N = 119.17 months
m = 12 i=7 PV = 1 PMT = 0 FV = 3 N = 188.88 months

#13: m=1 N=5 i = 10 PMT = 0 FV = 50000 PV = 31,046.07

#14: m = 4 N = 40 i = 12 PV = -30000 PMT = 0 FV = 97,861.13

#15: Annual: m = 1 N = 5 i = 7 PV = -5000 PMT = 0 FV = 7,012.76

Quarterly: m = 4 N = 20 i = 7 PV = -5000 PMT = 0 FV = 7,073.89
Monthly: m = 12 N = 60 i = 7 PV = -5000 PMT = 0 FV = 7,088.13

#16: Compute PV of each offer (you can do in FV as well).

APR of 11%
PV of 1st offer: $5,000 itself
PV of 2nd offer: m = 1 N = 8 i = 11 PMT = 1000 FV = 0 PV = $5,146.12
PV of 3rd offer: m = 1 N = 8 i = 11 PMT = 0 FV = 12000 PV = $5,207.12
Thus, choose the 3rd offer!

APR of 12%
PV of 1st offer: $5,000 itself
PV of 2nd offer: m = 1 N = 8 i = 12 PMT = 1000 FV = 0 PV = $4,967.64
PV of 3rd offer: m = 1 N = 8 i = 12 PMT = 0 FV = 12000 PV = $4,846.60
Thus, choose the 1st offer!

#17: m=1 N=3 PV = -12 PMT = 0 FV = 18 i = 14.47%

#18: m=1 N = 15 PV = -15000 PMT = 0 FV = 60000 i = 9.68%

#19: m=1 N = 20 PV = -50000 PMT = 4013 FV = 0 i = 5.00%

#20: m=1 N = 20 i = 12 PV = -400000 FV = 0 PMT = 53,551.51

#21: a. m=1 N = 5 i = 12 PMT = 0 PV = -80000 FV = 140,987.33

b. m=1 N = 10 i = 14 PV = -140987.33 PMT = 27029.18

#22: a. m = 12 N = 300 i = 10 PMT = 10000 FV = 0 PV = 1,100,472.30

b. m=1 N = 40 i=9 FV = -1100472.30 PV = 0 PMT = 3,256.97

#23: m=1 N=5 PV = -10000 PMT = 2500 FV = 0 i = 7.93%

#24: a. m = 12 N = 360 i=7 FV = 0 PV = -300000 PMT = 1995.91

b. $418,526.69

The following questions are the possible questions that you may see in your exam:

c. What is the total interest paid after the first 15 years payments? $281,319.95
d. What is the total amortization after the first 15 years payments? $77,943.40
e. What is the balance after the first 15 years payments? $222,056.60

#25:
Previous 5 years investment Next 5 years for investment 4 year College
| | | |
t = -5 t=0 t=5 t=9
(College Entrance Date)

 Find the value of 4-year college expense, discounting up to t=5 time point. This is the PVA
of $18,000 annuity for 4 years @ 10%: $57,057.58

 Find the value of $3,000 investment per year for 10 years (previous 5 and the next 5 years)
in terms of the value at t=5 time point where she will enroll. This is FV of $3,000 annuity
for 10 years @10% annual compounding: $47,812.27

 Find a shortage in funds between the two amounts: $57,057.58 - $47,812.27 = $9,245.31

 Find annual payment for the next 5 years to make the FV of $9,245.31.