8.

The time line is:

0 4

–$12,377,500 $10,311,500

We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of
each other. We will use the FV formula, that is:

FV = PV(1 + r) t

Solving for r, we get:

r = (FV/PV) – 1 1/t

r = ($10,311,500/$12,377,500) – 1  1/4

r = –.0446, or –4.46%

Notice that the interest rate is negative. This occurs when the FV is less than the PV.

10. To find the future value with continuous compounding, we use the equation:

FV = PVe rt

a.
0 9

$4,250 FV

FV = $4,250e .12(9)
= $11,785.58

b.
0 5

$4,250 FV

10. To find the future value with continuous compounding, we use the equation:

FV = PVe rt

a.
0 9
 $4,250 FV

FV = $4,250e .12(9)
= $11,785.58

b.
0 5

$4,250 FV
FV = $4,250e .12(9)
= $11,785.58

b.
0 5

$4,250 FV

FV = $4,250e .08(5)
= $6,244.64
c.
0 17

$4,250 FV

FV = $4,250e .05(17)
= $9,741.08

d.
0 10

$4,250 FV

FV = $4,250e .09(10)
= $10,061.30

13. To find the PVA, we use the equation:

PVA = C({1 – [1/(1 + r) ]}/r) t

0 1 15

PV $3,850 $3,85 $3,850 $3,850 $3,850 $3,850 $3,85 $3,850 $3,850

0 0

PVA@15 yrs: PVA = $3,850{[1 – (1/1.06 )]/.06} = $37,392.16

15
 0 1 40

PV $3,850 $3,85 $3,850 $3,850 $3,850 $3,850 $3,85 $3,850 $3,850

0 0

PVA@40 yrs: PVA = $3,850{[1 – (1/1.06 )]/.06} = $57,928.24

40

0 1 75

PV $3,850 $3,85 $3,850 $3,850 $3,850 $3,850 $3,85 $3,850 $3,850

0 0

PVA@75 yrs: PVA = $3,850{[1 – (1/1.06 )]/.06} = $63,355.02

75

To find the PV of a perpetuity, we use the equation:

PV = C/r

0 1 ∞

PV $3,850 $3,85 $3,850 $3,850 $3,850 $3,850 $3,85 $3,850 $3,850

0 0

PV = $3,850/.06 = $64,166.67

Notice that as the length of the annuity payments increases, the present value of the annuity
approaches the present value of the perpetuity. The present value of the 75-year annuity and the
present value of the perpetuity imply that the value today of all perpetuity payments beyond 75 years
is only $811.65.

18. The cost of a case of wine is 10 percent less than the cost of 12 individual bottles, so the cost of a case
will be:

Cost of case = (12)($10)(1 – .10)

Cost of case = $108 

Now, we need to find the interest rate. The cash flows are an annuity due, so:

0 1 … 12
 –$108 $10 $10 $1 $10 $1 $10 $10 $1
$10 0 0 0

PVA = (1 + r)C({1 – [1/(1 + r) ]}/r)

t

$108 = (1 + r)$10({1 – [1/(1 + r) ]}/r)

12

Solving for the interest rate, we get:

    r = .0198, or 1.98% per week

PV = $3,850/.06 = $64,166.67

Notice that as the length of the annuity payments increases, the present value of the annuity
approaches the present value of the perpetuity. The present value of the 75-year annuity and the
present value of the perpetuity imply that the value today of all perpetuity payments beyond 75 years
is only $811.65.
23. Although the stock and bond accounts have different interest rates, we can draw one time line, but we
need to remember to apply different interest rates. The time line is:

0 1 360 361 660

... …

Stock $850 $850 $850 $85 $850

0
C C C
Bond $250 $250 $250 $25 $250
0

We need to find the annuity payment in retirement. Our retirement savings ends at the same time the
retirement withdrawals begin, so the PV of the retirement withdrawals will be the FV of the retirement
savings. So, we find the FV of the stock account and the FV of the bond account and add the two FVs.

Stock account: 
FVA = $850[{[1 + (.11/12)] – 1}/(.11/12)] 
360

FVA = $2,383,841.78

Bond account: 
FVA = $250[{[1 + (.06/12)] – 1}/(.06/12)] 
360

FVA = $251,128.76

So, the total amount saved at retirement is: 

$2,383,841.78 + 251,128.76 = $2,634,970.54

Solving for the withdrawal amount in retirement using the PVA equation gives us:

PVA = $2,634,970.54 = C[1 – {1/[1 + (.05/12)] }/(.05/12)]

300

C = $2,634,970.54/171.0600 
C = $15,403.78 withdrawal per month

26. This is a growing perpetuity. The present value of a growing perpetuity is:

PV = C/(r – g)
PV = $225,000/(.101 – .032)
PV = $3,260,869.57

It is important to recognize that when dealing with annuities or perpetuities, the present value equation
calculates the present value one period before the first payment. In this case, since the first payment is in
two years, we have calculated the present value one year from now. To find the value today, we discount
this value as a lump sum. Doing so, we find the value of the cash flow stream today is:

PV = FV/(1 + r) t

PV = $3,260,869.57/(1 + .101) 1

PV = $2,961,734.39
30. The amount borrowed is the value of the home times one minus the down payment, or:

Amount borrowed = $775,000(1 – .20)

Amount borrowed = $620,000

The time line is:

0 1 360

$620,000 C C C C C C C C C

The monthly payments with a balloon payment loan are calculated assuming a longer amortization
schedule, in this case, 30 years. The payments based on a 30-year repayment schedule would be:

PVA = $620,000 = C({1 – [1/(1 + .049/12) ]}/(.049/12))   360

C = $3,290.51

Now, at Year 8 (Month 96), we need to find the PV of the payments which have not been made. The
time line is:

96 97 360

PV $3,290.5 $3,290.51 $3,290.51 $3,290.5 $3,290.51 $3,290.51 $3,290.5 $3,290.51 $3,290.51

1 1 1

The balloon payment will be:

PVA = $3,290.51({1 – [1/(1 + .049/12) 22(12)

]}/(.049/12)) 
PVA = $531,028.71

33.   The company will accept the project if the present value of the increased cash flows is greater than the
cost. The cash flows are a growing perpetuity, so the present value is:

PV = C{[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)] }    t

PV = $94,000{[1/(.10 – .04)] – [1/(.10 – .04)] × [(1 + .04)/(1 + .10)] } 5

PV = $383,135.02

34. Since your salary grows at 3.5 percent per year, your salary next year will be:

Next year’s salary = $48,000(1 + .035)

Next year’s salary = $49,680 
 This means your deposit next year will be:

Next year’s deposit = $49,680(.09)

Next year’s deposit = $4,471.20

Since your salary grows at 3.5 percent, your deposit will also grow at 3.5 percent. We can use the present
value of a growing annuity equation to find the value of your deposits today. Doing so, we find:

PV = C{[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)] }   

t

PV = $4,471.20{[1/(.10 – .035)] – [1/(.10 – .035)] × [(1 + .035)/(1 + .10)] }

40

PV = $62,770.18

34. Since your salary grows at 3.5 percent per year, your salary next year will be:

Next year’s salary = $48,000(1 + .035)

Next year’s salary = $49,680 

This means your deposit next year will be:

Next year’s deposit = $49,680(.09)

Next year’s deposit = $4,471.20

Since your salary grows at 3.5 percent, your deposit will also grow at 3.5 percent. We can use the present
value of a growing annuity equation to find the value of your deposits today. Doing so, we find:

PV = C{[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)] }   

t

PV = $4,471.20{[1/(.10 – .035)] – [1/(.10 – .035)] × [(1 + .035)/(1 + .10)] } 40

PV = $62,770.18
Now, we can find the future value of this lump sum in 40 years. We find:

FV = PV(1 + r) t

FV = $62,770.18(1 + .10) 40

FV = $2,840,931.41

This is the value of your savings in 40 years.

36. The time line is:

0 1 ?

–$15,000
$22 $225 $22 $225 $225 $22 $225 $22 $225
5 5 5 5

Here we are given the FVA, the interest rate, and the amount of the annuity. We need to solve for the
number of payments. Using the FVA equation:
 FVA = $15,000 = $225[{[1 + (.065/12)] – 1}/(.065/12)] t

Solving for t, we get:

1.00542 = 1 + ($15,000/$225)(.065/12) 
t

t = ln 1.36111/ln 1.00542 
t = 57.07 payments

40. The time line is:

0 1 2 3 4 5 6 7 8 9 10

$1M $1.45M $1.9M $2.35M $2.8M $3.25M $3.7M $4.15M $4.6M $5.05M $5.5M

To solve this problem, we need to find the PV of each lump sum and add them together. It is important to
note that the first cash flow of $1 million occurs today, so we do not need to discount that cash flow. The
PV of the lottery winnings is: 

PV = $1,000,000 + $1,450,000/1.062 + $1,900,000/1.062 + $2,350,000/1.062 + $2,800,000/1.062  

2 3 4

+ $3,250,000/1.062 + $3,700,000/1.062 + $4,150,000/1.062 + $4,600,000/1.062  

5 6 7 8

+ $5,050,000/1.062 + $5,500,000/1.062  
9 10

PV = $24,717,320.99

41. Here we are finding the interest rate for an annuity cash flow. We are given the PVA, the number of
periods, and the amount of the annuity. We should also note that the PV of the annuity is the amount
borrowed, not the purchase price, since we are making a down payment on the warehouse. The amount
borrowed is:

Amount borrowed = .80($2,600,000) = $2,080,000

The time line is:

0 1 360

–$2,080,000 $14,200 $14,200 $14,200 $14,200 $14,200 $14,200 $14,200 $14,200 $14,200

Using the PVA equation:

PVA = $2,080,000 = $14,200[{1 – [1/(1 + r) ]}/r] 360

Unfortunately this equation cannot be solved to find the interest rate using algebra. To find the interest
rate, we need to solve this equation on a financial calculator, using a spreadsheet, or by trial and error. If
you use trial and error, remember that increasing the interest rate lowers the PVA, and decreasing the
interest rate increases the PVA. Using a spreadsheet, we find:
r = .605%

The APR is the monthly interest rate times the number of months in the year, so:

APR = 12(.605%) 
APR = 7.26%

And the EAR is:

EAR = (1 + .00605) – 1 
12

EAR = .0750, or 7.50%

47. The time line is:

0 1 12

…
– $1,973.3 $1,973.3 $1,973.3 $1,973.3 $1,973.3 $1,973.3 $1,973.3 $1,973.3 $1,973.3
$20,00 3 3 3 3 3 3 3 3 3
0

To find the APR and EAR, we need to use the actual cash flows of the loan. In other words, the interest
rate quoted in the problem is only relevant to determine the total interest under the terms given. The
interest rate for the cash flows of the loan is:

PVA = $20,000 = $1,973.33{(1 – [1/(1 + r) ])/r} 12

Again, we cannot solve this equation for r, so we need to solve this equation on a financial calculator, using a
spreadsheet, or by trial and error. Using a spreadsheet, we find:

r = 2.699% per month

So the APR that would legally have to be quoted is:

APR = 12(2.699%) 
APR = 32.39%   

And the EAR is:

EAR = 1.02699 – 1  12

EAR = .3766, or 37.66%

48. The time line is:

0 1 18 19 28

… …

$5,500 $5,500 $5,500 $5,500

The cash flows in this problem are semiannual, so we need the effective semiannual rate. The
interest rate given is the APR, so the monthly interest rate is:

Monthly rate = .08/12 

Monthly rate = .0067

To get the semiannual interest rate, we can use the EAR equation, but instead of using 12 months as
the exponent, we will use 6 months. The effective semiannual rate is:

Semiannual rate = 1.0067 – 1  6

Semiannual rate = .04067, or 4.067%

 We can now use this rate to find the PV of the annuity. The PV of the annuity is:

PVA @ Year 9: $5,500{[1 – (1/1.04067 )]/.04067} = $44,460.93  10

Note, this is the value one period (six months) before the first payment, so it is the value at Year 9.
So, the value at the various times the questions asked for uses this value nine years from now. 

PV @ Year 5: $44,460.93/1.04067 = $32,319.56 8

Note, you can also calculate this present value (as well as the remaining present values) using the
number of years. To do this, you need the EAR. The EAR is:

EAR = (1 + .0067) – 1  12

EAR = .0830, or 8.30% 

So, we can find the PV at Year 5 using the following method as well:

PV @ Year 5: $44,460.93/1.0830 = $32,319.56 4

The value of the annuity at the other times in the problem is:

PV @ Year 3: $44,460.93/1.04067 12
= $27,555.54
PV @ Year 3: $44,460.93/1.0830   6
= $27,555.54

PV @ Year 0: $44,460.93/1.04067 18
= $21,693.23
PV @ Year 0: $44,460.93/1.0830 9
= $21,693.23

49. a. The time line for the ordinary annuity is:

0 1 2 3 4 5

PV $14,500 $14,500 $14,500 $14,500 $14,500

If the payments are in the form of an ordinary annuity, the present value will be:

PVA = C[{1 – [1/(1 + r) ]}/r)] t

PVA = $14,500[{1 – [1/(1 + .071) ]}/.071] 5

PVA = $59,294.01

The time line for the annuity due is:

0 1 2 3 4 5
 PV
$14,500 $14,50 $14,500 $14,500 $14,500
0

If the payments are an annuity due, the present value will be:

PVA = (1 + r)PVA
due

PVA = (1 + .071)$53,183.45
due

PVA = $63,503.89
due

b. The time line for the ordinary annuity is:

0 1 2 3 4 5

FV
$14,500 $14,500 $14,500 $14,500 $14,500

We can find the future value of the ordinary annuity as:

FVA = C{[(1 + r) – 1]/r}

t

FVA = $14,500{[(1 + .071) – 1]/.071} 5

FVA = $83,552.26

So, we can find the PV at Year 5 using the following method as well:

PV @ Year 5: $44,460.93/1.0830 = $32,319.56

4

The value of the annuity at the other times in the problem is:

PV @ Year 3: $44,460.93/1.04067 12
= $27,555.54
PV @ Year 3: $44,460.93/1.0830   6
= $27,555.54

PV @ Year 0: $44,460.93/1.04067 18
= $21,693.23
PV @ Year 0: $44,460.93/1.0830 9
= $21,693.23

49. a. The time line for the ordinary annuity is:

0 1 2 3 4 5

PV $14,500 $14,500 $14,500 $14,500 $14,500

If the payments are in the form of an ordinary annuity, the present value will be:

PVA = C[{1 – [1/(1 + r) ]}/r)]

t

PVA = $14,500[{1 – [1/(1 + .071) ]}/.071] 5

 PVA = $59,294.01

The time line for the annuity due is:

0 1 2 3 4 5

PV
$14,500 $14,50 $14,500 $14,500 $14,500
0

If the payments are an annuity due, the present value will be:

PVA = (1 + r)PVA
due

PVA = (1 + .071)$53,183.45
due

PVA = $63,503.89
due

b. The time line for the ordinary annuity is:

0 1 2 3 4 5

FV
$14,500 $14,500 $14,500 $14,500 $14,500

We can find the future value of the ordinary annuity as:

FVA = C{[(1 + r) – 1]/r}

t

FVA = $14,500{[(1 + .071) – 1]/.071} 5

FVA = $83,552.26

55. We need to find the first payment into the retirement account. The present value of the desired amount at
retirement is:

PV = FV/(1 + r) t

PV = $4,500,000/(1 + .094) 35

PV = $193,912.70

This is the value today. Since the savings are in the form of a growing annuity, we can use the growing
annuity equation and solve for the payment. Doing so, we get:

PV = C{[1/(r – g)] – [1/(r – g)] × [(1 + g)/(1 + r)] }    t

$193,912.70 = C{[1/(.094 – .03)] – [1/(.094 – .03)] × [(1 + .03)/(1 + .094)] }35

C = $14,122.87

This is the amount you need to save next year. So, the percentage of your salary is:

Percentage of salary = $14,122.87/$91,000

 Percentage of salary = .1552, or 15.52%

Note that this is the percentage of your salary you must save each year. Since your salary is increasing at
3 percent, and the savings are increasing at 3 percent, the percentage of salary will remain constant.

59. To find the quarterly salary for the player, we first need to find the PV of the current contract. The cash
flows for the contract are annual, and we are given a daily interest rate. We need to find the EAR so the
interest compounding is the same as the timing of the cash flows. The EAR is:

EAR = [1 + (.048/365)] – 1 
365

EAR = .0492, or 4.92%

The PV of the current contract offer is the sum of the PV of the cash flows. So, the PV is:

PV = $7,900,000 + $4,500,000/1.0492 + $5,300,000/1.0492 + $6,100,000/1.0492  

2 3

      + $6,700,000/1.0492 + $7,700,000/1.0492 + $9,300,000/1.0492  

4 5 6

PV = $40,845,641.29

The player wants the contract increased in value by $2,000,000, so the PV of the new contract will
be:

PV = $40,845,641.29 + 2,000,000 
PV = $42,845,641.29

The player has also requested a signing bonus payable today in the amount of $10 million. We can
subtract this amount from the PV of the new contract. The remaining amount will be the PV of the
future quarterly paychecks.

$42,845,641.29 – 10,000,000 = $32,845,641.29

To find the quarterly payments, first realize that the interest rate we need is the effective quarterly
rate. Using the daily interest rate, we can find the quarterly interest rate using the EAR equation,
with the number of days being 91.25, the number of days in a quarter (= 365/4). The effective
quarterly rate is:

Effective quarterly rate = [1 + (.048/365)] – 1 

91.25

Effective quarterly rate = .01207, or 1.207%

Now we have the interest rate, the length of the annuity, and the PV. Using the PVA equation and
solving for the payment, we get:

PVA = $32,845,641.29 = C{[1 – (1/1.01207 )]/.01207} 

6(4)

C = $1,584,562.27

72. a. The APR is the interest rate per week times 52 weeks in a year, so:

APR = 52(6.3%) 
APR = 327.60%
 EAR = (1 + .063) – 1 
52

EAR = 22.9734, or 2,297.34%

      b. In a discount loan, the amount you receive is lowered by the discount, and you repay the full
principal. With a discount of 6.3 percent, you would receive $9.37 for every $10 in principal, so the
weekly interest rate would be:

$10 = $9.37(1 + r)
r = $10/$9.37 – 1 
r = .0672, or 6.72% 

Note the dollar amount we use is irrelevant. In other words, we could use $.937 and $1, $93.70
and $100, or any other combination and we would get the same interest rate. Now we can find the
APR and the EAR:

APR = 52(6.72%) 
APR = 349.63%  

EAR = (1 + .0672) – 1  52

EAR = 28.4809, or 2,848.09%

      c. Using the cash flows from the loan, we have the PVA and the annuity payments and need to find
the interest rate, so:

PVA = $72.32 = $25[{1 – [1/(1 + r) ]}/r]

4

Using a spreadsheet, trial and error, or a financial calculator, we find:

r = 14.35% per week

APR = 52(14.35%) 
APR = 746.31%

EAR = 1.1435 – 1 
52

EAR = 1,067.3531, or 106,735.31%