TIME VALUE OF MONEY

1. If you buy a factory for $250,000 and the terms are 20% down, the balance
to be paid off over 30 years at a 12% rate of interest on the unpaid balance,
what are the 30 equal annual payments? [$24,828.73]

2. You start saving now for your college education. You will begin college at age 18
and will need $4,000 per year at the end of each of the next 4 years. You will
make a deposit 1 year from today into an account which pays 6% compounded
annually and an identical deposit each year until you start college. If an annual
deposit of $1,987 will allow you to reach your goal, how old are you now? [12
Years Old]

3. On January 1, 1985, a graduate student developed a financial plan which would

provide enough money at the end of his graduate work (January 1, 1990) to
open a business of his own. His plan was to deposit $8,000 per year, starting
immediately, into an account paying 10% compounded annually. His activities
proceeded according to plan except that at the end of his third year he
withdrew $5,000 to take a Caribbean cruise, at the end of the fourth year he
withdrew $5,000 to buy a used Camaro, and at the end of the fifth year he had
to withdraw $5,000 to pay to have his dissertation typed. His account, at the
end of the fifth year, will be less than the amount he had originally planned on
by how much? [$16,550]

4. You plan on working for 10 years and then leaving for the Alaskan back country.
You figure you can save $1,000 a year for the first 5 years and $2,000 a year
for the last 5 years. In addition, your family has given you a $5,000 graduation
gift. If you put the gift and your future savings in an account paying 8%
compounded annually, what will your 'stake' be when you leave for the
wilderness 10 years hence? [$31,147.50]

5. You have $1,000 invested in an account which pays 8% compounded annually.

You have found an equally safe deposit which will pay 8%, quarterly
compounding, for 2 years. How much additional interest will you earn by shifting
accounts? [$5.26]

6. If $100 is placed into an account that earns a nominal 4% compounded

quarterly, what will it be worth 5 years from today? [$122.05]
 7. Visser Distributors is financing a new truck with a loan of $10,000 to be repaid
in 5 annual installments of $2,505. What annual interest rate is the company
paying? [8%]

8. Suppose you have $2 million in a 2-year account paying a 6% nominal rate,

compounded annually. Another bank offers you an account for 2 years paying a
6% nominal rate, but compounded bimonthly (that is, 6 times a year). If you
move your account, how much additional interest will you earn over the 2 years?
[$6,450.06]

9. You have the opportunity to buy a perpetuity paying $1,000 annually. Your
demanded rate of return on this investment is 15%. You would be essentially
indifferent to buying or not buying the investment if it were offered at what
price? [$6,666.67]

10. You have decided to deposit your scholarship money ($1,000) in a savings
account paying 8% interest, compounded quarterly. Eighteen months later, you
decide to go to the mountains rather than school and you close out your
account. How much money will you receive? [$1,126.16]

11. The present value (t = 0) of the following cash flow stream is $5,979.04 when
discounted at 12% annually. What is the value of the MISSING (t = 2) cash
flow? [$2,999.93]

0 1 2 3 4
---|---------|----------|----------|----------|-----
$0 $1,000 $? $2,000 $2,000

12. You want to set up a trust fund. If you make a payment at the end of each year
for twenty years and earn 10% per year, how large must your annual payments
be so that the trust is worth $100,000 at the end of the twentieth year?
[$1,745.96]

13. Starting on January 1, 1987, and then on each January 1 until 1996 (10
payments), you will make payments of $1,000 into an investment which yields 10
percent. How much will your investment be worth on December 31 in the year
2006? [$45,468.85]

14. Your 69-year old aunt has savings of $35,000. She has made arrangements to
enter a home for the aged upon reaching the age of 80. Before going into the
 home, she wants to decrease the account balance by a constant amount each
year for ten years, with a zero balance remaining. How much can she withdraw
each year if she earns 6 percent annually on her savings? Her first withdrawal
would be one year from today. [$4,755.37]

15. A rich aunt promises you $35,000 exactly 5 years after you graduate from
college. What is the value of the promised $35,000 if you could negotiate
payment upon graduation? Assume an interest rate of 12 percent.
[$19,859.94]

16. John Roberts is retiring one year from today. How much should John currently
have in a retirement account earning 10 percent interest to guarantee
withdrawals of $25,000 per year for 10 years? [$153,615]

17. You place $5,000 in your credit union at an annual interest rate of 12 percent
compounded monthly. How much will you have in 2 years if all interest remains
in the accounts? [$6,348.67]

18. Find the present value for the following income stream if the interest rate is
12 percent and the payments occur at the end of each year. [$5,001.74]

YEARS CASHFLOW
1-4 $ 500
5-10 $ 800
11-15 $1,200

19. You have just had your thirtieth birthday. You have two children. One will go
to college 10 years from now and require four beginning-of-year payments for
college expenses of $10,000, $11,000, $12,000, and $13,000. The second child
will go to college 15 years from now and require four beginning-of-year
payments of $15,000, $16,000, $17,000, and $18,000. In addition, you plan to
retire in 30 years. You want to be able to withdraw $50,000 per year (at the
end of each year) from an account throughout your retirement. You expect to
live 20 years beyond retirement. The first withdrawal will occur on your sixty-
first birthday. What equal, annual, end-of- year amount must you save for each
of the next 30 years to meet these goals, if all savings earn a 15 percent annual
rate of return? [$3,123.10]
20. Find the present value of the cash flows shown using a discount rate of 8
percent. Assume that each payment occurs at the end of the year.
[$1,166.80]

YEAR CASHFLOW
1-4 $100/yr.
5 200
6 300
7-15 100/yr.
16 400

21. According to a local department store, the store charges its customers 1% per
month on the outstanding balances of their charge accounts. What is the
effective annual rate on such customer credit? Assume the store recalculates
your account balance at the end of each month. [12.68%]

22. Your bank has offered you a $15,000 loan. The terms of the loan require you
to pay back the loan in five equal annual installments of $4,161.00. The first
payment will be made a year from today. What is the effective rate of
interest on this loan? [12.00%]

23. You have agreed to pay a creditor $5,000 one year hence, $4,000 two years
hence, $3,000 three years hence, $2,000 four years hence, and a final payment
of $1,000 five years from now. Due to budget considerations you would like to
make five equal annual payments to satisfy your contract. If the agreed upon
interest is 5% effective per year, what should the equal annual payments be?
[$3,097.43]

24. You have purchased a new sailboat and have the option of paying the entire
$8,000 now or making equal, annual payments for the next 4 years, the first
payment due one year from now. If your time value of money is 7 percent, what
would be the largest amount for the equal, annual payments that you would be
willing to undertake? [$2,361.83]

25. You are 35 years old and wish to provide for your old age. Suppose you invest
$1,000 per year at an effective rate of 5 percent per year for the next 25
years, with the first deposit beginning one year hence. Beginning one year
after your last $1,000 deposit you start withdrawing $X per year for the next
20 years. How large must $X be in order to use up all of your funds?
[$3,829.74]
26. Your grandmother is thrilled that you are going to college and plans to reward
you at graduation in 4 years with a new car. She would like to set aside an equal
amount at the completion of each of your college years. If her account earns
11.5 percent and the new car will cost $30,000, how much must she deposit
each year? Assume her first deposit is in exactly one year. [$6,323.22]

27. Robert Smith's son Joseph is ten years old today. Joseph is already making
plans to go to college on his eighteenth birthday and his father wants to start
putting away money now for that purpose. Smith estimates that Joseph will
need $16,000, $17,000, $18,000, and $19,000 for his freshman, sophomore,
junior, and senior years. He plans on making these amounts available to Joseph
at the beginning of each of these years. Smith would like to make eight
deposits (the first of which would be made on Joseph's eleventh birthday, 1
year from now) in an account earning 10 percent. He wants the account to
eventually be worth enough to pay for Joseph's college expenses. Any balances
remaining in the account will continue to earn 10 percent. How much will Smith
have to deposit in this planning account each year to provide for Joseph's
education? [$5,299.46]

28. What is the present value of an investment that promises to pay $10,000 for
the first five years and $20,000 for the second five years if the discount rate
is 18 percent? [$58,610]

29. Suppose that a local savings and loan association advertises a 6 percent annual
rate of interest on regular accounts, compounded monthly. What is the
effective annual percentage rate of interest paid by the savings and loan?
[6.17%]

30. How much would you pay for a joint venture that is expected to yield $20,000
per year for 5 years, and then $50,000 per year for the next 10 years, but will
require an expenditure of $100,000 to terminate the venture at the end of its
productive life? Assume that you require a 20 percent return on the
investment because of its high risk. [$137,565]

31. Alphonzo Provenzono has been married 20 years. He is planning a surprise for
his 50th wedding anniversary to take himself and his wife back to the old
country. He plans to save $1,000 per year that will earn 9 percent. He expects
to withdraw $15,000 per year in the old country. How many years will Alphonzo
and his wife be able to stay? [20 Years]

32. Mr. Lewis, age 29, wants to begin planning for his retirement at age 65. Upon
retiring, he wants to be able to withdraw $15,000 per year on each birthday
 for 10 years. The first withdrawal will be on his 66th birthday. He will receive
a large inheritance on his 30th birthday in two weeks, and he wants to know
how much he needs to invest on that day to be able to attain his retirement
income. He will invest the money in an account paying 10 percent annual
interest for the life of the investment. How much does he need to deposit on
his 30th birthday? [$3,280]

33. Jason and Bryan McNutt are presently 3 and 5 years old, respectively. Their
parents plan to send them to college when each turns 18 at a cost of $10,000
per year for each, with the payments to be made at the beginning of each year.
How much must the parents contribute annually to a college fund to ensure the
boys' college education if the interest rate is 12 percent compounded annually?
The deposits start in one year and end when the older brother starts college.
[$2,181.24]

34. If you have $5,436 in an account that has been paying an annual rate of 10%,
compounded continuously, since you deposited some funds 10 years ago, how
much was the original deposit? [$1,999.79]

35. For a 10-year deposit, what annual rate payable semi-annually will produce the
same effective rate as 4% compounded continuously? [4.04%]

36. How much should you be willing to pay for an account today that will have a
value of $1,000 in 10 years under continuous compounding if the nominal rate is
10%? [$367.88]

37. In 1975, its first year of operations, The Coffee Mill had earnings per share
(EPS) of $0.26. Four years later, in 1978, EPS was up to $0.38, and 7 years
later, in 1985, EPS was up to $0.535. It appears that the first 4 years
represented an unusual growth situation and that since then a more normal
growth rate has been sustained. What are the two rates of growth? [10% and
5% respectively]

38. Digger O'Dell is the local friendly undertaker. His business has improved since
he adopted his new motto, "I will be the last man to ever let you down." Given
his expanded business, he wishes to build a new establishment financed with a
short-term mortgage. He can borrow for eight years at 9 percent. He will pay
monthly payments on the $50,000 he will borrow. Determine his monthly
payment and develop an amortization schedule for the first four months.
[Monthly Payment = $732.51]
39. On December 1, 1998, Otto Van Auto borrowed $25,000 for his new car. The
loan terms were: 48 month loan, payments beginning January 1, 1999, 10.5%
interest. However, as a marketing promotion, a monthly payment will not be
required on the month of his birthday, October. What will be the monthly
payment for the loan? How much larger is this payment than a standard 48
month loan? [Monthly Payment = $696.35 : Difference = $56.26]