EXERCISES

1) Acme borrowed $100,000 from a local bank, which charges them an interest rate of 7% per
year. If Acme pays the bank $8,000 per year, now many years will it take to pay off the loan?
P = $100,000
A = $8,000
i = 7% per year
N=?

100,000 = 8,000*(P/A, 7%, N)

By using Excel spreadsheet;

N = NPER (rate; pmt; pv) or N = TAKSİT_SAYISI (Oran;dönemsel_ödeme;bd)
N = NPER (0.07; -8,000; 100,000)
N = 30.73 years

2) Jill invested $1,000 each year for five years in a local company and sold her interest after
five years for $8,000. What annual rate of return did Jill earn?
F = $8,000
A = $1,000
N = 5 years

8,000 = 1,000*(F/A, i, 5)

By using Excel spreadsheet;

i = RATE (NPER; pmt; fv) or i = FAİZ_ORANI (dönem_sayısı;dönemsel_ödeme;gd)
i = RATE (5; -1,000; 8,000)
i = 24% per year

1
3) Irene just purchased a new sports car and wants to also set aside cash for future maintenance
expenses. The car has a bumper-to-bumper warranty for the first five years. Irene estimates
that she will need approximately $2,000 per year in maintenance expenses for years 6-10, at
which time she will sell the vehicle. How much money should Irene deposit into an account
today, at 8% per year, so that she will have sufficient funds in that account to cover her projected
maintenance expenses?
N = 10 years
J = 5 years (the annuity is deferred 5 periods)
A = $2,000
i = 8%
First, we will use (P/A, i%, N-J) to find the value of the deferred annuity at the end of period J.

P5 = A*(P/A, i%, N-J) = 2,000*(P/A, 8%, 5) = 2,000*[((1 + 0.08)5 – 1)/ (0.08*(1 + 0.08)5)]
P5 = $7,985.42

Now that P5 is known, the next step is to calculate P0. With respect to P0, P5 is a future
equivalent, and hence it could also be denoted F5. Money at a given point in time, such as the
end of period 5, is the same regardless of whether it is called a present equivalent or a future
equivalent. Hence,
P0 = F5(P/F, 8%, 5) = F*(1 + i)-N = 7,985.42*(1 + 0.08)-5 = 7985.42*(0.6806) = $5,434.88

4) What is the annual equivalence of the cash flows seen in the table?
End of Year Cash Flows ($)
1 2,000
2 3,000
3 4,000
4 5,000

The table can be arranged like below.

End of Year Annuity ($) Gradient ($)
1 2,000 0
2 2,000 1,000
3 2,000 2,000
4 2,000 3,000

2
A = 2,000 + G*(A/G, 8%, 4) = 2,000 + 1,000*[(1/0.08) – (4/((1.08)4 – 1))] = $3,404

5) Acme Miracle projects good things for their new weight loss pill, LoseIt. Revenues this year
are expected to be $1.1 million, and Acme believes they will increase 15% per year for the next
5 years. What is the present value for the anticipated revenues? Acme uses an interest rate of
20%.

P can be calculated by using the formula:

f = 0.15
i = 0.20
A1 = $1.1 million
N = 5 years
P = 1,100,000*[1 – (P/F, 20%, 5)*(F/P, 15%, 5)] / (0.20 – 0.15)
P = 1,100,000*[1 – (1 + 0.20)-5 * (1 + 0.15)5] / 0.05 = $4,216,974

6) F3 = $2,500 i1 = 8% i2 = 10% i3 = 11% P =?

P = 2,500 x (1 + 0.08)-1 x (1 + 0.10)-1 x (1 + 0.11)-1

P = 2,500*(0.9259)*(0.9091)*(0.9009) = $1,896

7) For an 18% nominal rate, compounded quarterly, what is the effective interest?

r = 0.18
M = 12 / 3 = 4 (since there are 4 quarters in a year)
i = [1 + (0.18/4)]4 – 1 = 0.1925 = 19.25%

3
8) For an 7% nominal rate, compounded monthly, what is the effective interest?

r = 0.07
M = 12 / 1 = 12 (since there are 12 months in a year)
i = [1 + (0.07/12)]12 – 1 = 0.1925 = 0.0723 = 7.23%