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Assignment 2

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55 views4 pages

Assignment 2

Uploaded by

tcthong.iseartclub
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ASSIGNMENT #2 – TIME VALUE OF MONEY

Deadline: 23/03/2016
1. You have just invested a one-time amount of $5,000 in a stock-based mutual
fund. This fund should earn (on average) 9% per year over a long period of time.
How much will your investment be worth in 35 years?

2. A12-cylinder heavy-duty diesel engine will have a guaranteed residual value of


$1,000 in 5 years. Today (year 0) the equivalent worth of this engine is how
much if the interest rate is 9% per year?

3. A student’s average tuition fee is $1,000 per year over 20 years of student life.
Find the total fees the student would pay at the end of 20 years, if the interest
rate is 5% compounded annually.

4. You owe your best friend $2,000. Because you are short on cash, you offer to
repay the loan over 12 months under the following condition. The first payment
will be $100 at the end of month one. The second payment will be $100 + G at
the end of month two. At the end of month three, you’ll repay $100 + 2G. This
pattern of increasing G amounts will continue for all remaining months.

a. What is the value of G if the interest rate is 0.5% per month?


b. What is the equivalent uniform monthly payment?
c. Repeat Part (a) when the first payment is $150 (i.e., determine G).

5. Suppose that the parents of a young child decide to make annual deposits into a
savings account, with the first deposit being made on the child’s fifth birthday and
the last deposit being made on the 15th birthday. Then, starting on the child’s
18th birthday, the withdrawals as shown will be made. If the effective annual
interest rate is 8% during this period of time, what are the annual deposits in
years 5 through 15? Use a uniform gradient amount (G) in your solution.
Cashflow diagram for Problem 5

6. Suppose that your rich uncle has $1,000,000 that he wishes to distribute to his
heirs at the rate of 100,000 per year. If the $1,000,000 is deposited in a bank
account that earns 6% interest per year, how many years will it take to
completely deplete the account? How long will it take if the account earns 8%
interest per year instead of 6%?

7. John Smith took out a student loan to complete his four-year engineering degree.
He borrowed $5,000, four years ago when the interest rate was 5% per year. A
further $6,000 was borrowed 3 years ago at 3% per year. Two years ago he
borrowed $6,000 at 6% and last year $7,000 was borrowed at 8% per year. If
Smith makes annual payments to repay his total debt payments up to 10 years
with 8% fixed annual interest rate. What is the amount of each payment?

8. The U.S. stock market has returned an average of about 9% per year since
1900. This return works out to a real return (i.e., adjusted for inflation) of
approximately 6% per year?
a. If you invest $100,000 and you earn 6% a year on it, how much real
purchasing power will you have in 30 years?
b. If you invest $5,000 per year for 20 years, how much real purchasing power
will you have at the end of 30 years? The interest rate is 6% per year.

9. Consider the accompanying cash-flow diagram.


a. If P = $1,000, A = $200, and i% = 12% per year, then N =?
b. If P = $1,000, A = $200, and N = 10 years, then i =?
c. If A = $200, i% = 12% per year, and N = 5 years, then P =?
d. If P = $1,000, i% = 12% per year, and N = 5 years, then A =?
Figure for Problem 9

10. Kris borrows some money in her senior year to buy a new car. The car
dealership allows her to defer payments for 12 months, and Kris makes 48 end-
of-month payments thereafter. If the original note (loan) is for $28,000 and
interest in 0.5% per month on the unpaid balance, how much will Kris’ payment
be?

11. Major overhaul expenses of $5,000 each are anticipated for a large piece of
earthmoving equipment. The expenses will occur at EOY four and will continue
every three years thereafter up to and including year 13. The interest rate is 12%
per year.
a. Draw a cash-flow diagram.
b. What is the present equivalent of the overhaul expenses at time 0?
c. What is the annual equivalent expense during only years 5–13?

12. It is estimated that you will pay about $80,000 into the Social Security system
(FICA) over your 40-year work span. For simplicity, assume this is an annuity of
$2,000 per year, starting with your 26th birthday and continuing through your
65th birthday.
a. What is the future equivalent worth of your Social Security savings when you
retire at age 65 if the government’s interest rate is 6% per year?
b. What annual withdrawal can you make if you expect to live 20 years in
retirement? Let i = 6% per year.

13. Maintenance expenses for a bridge on the Ohio River are estimated to be
$20,000 per year for the first 8 years, followed by two separate $100,000
expenditures in years 12 and 18. The expected life of the bridge is 30 years. If i =
6% per year, what is the equivalent uniform annual expense over the entire 30-
year period?
14. Determine the value of P0, as a function of H, for these two investment
alternatives to be equivalent at an interest rate of i = 15% per year:

Figure for Problem 14

15. A geometric gradient that increases at 𝑓 ̅ = 6% per year for 15 years is shown in
the accompanying diagram. The annual interest rate is 12%. What is the present
equivalent value of this gradient?

Figure for Problem 15

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