TIME VALUE OF MONEY

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $2,950 at the
end of Year 4 if the interest rate is 5%?
Answer is 10,405

Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 18.5% but
with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the
repayment of principal?
Answer is 84.51%

After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own
business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and
$15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year
from today. In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit
immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you
start your business 12 years from now?
Answer is 277,791

Solution:
There are 3 cash flow streams: the gift and the two annuities. The gift will grow for 12 years. Then
there is a 6-year annuity whose FV at the end of year 6 will compound for an additional 6 years. Finally,
there is a second 6-year annuity. The sum of the compounded values of those three sets of cash flows is
the final amount.

Interest rate 9.0%

1st annuity $7,500
2nd annuity $15,000
Gift $25,000
Total years 12
Annuity years 6

Amount at Amount at end of

end of Year 6 Year 12
$56,425 Compound @ 9% $94,630
NA $112,850
NA $70,317
Final amt: $277,797

Suppose you are buying your first condo for $220,000, and you will make a $15,000 down payment. You
have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5%
nominal interest rate, with the first payment due in one month. What will your monthly payments be?
$1,295.74