ACTIVITY 4 MFCapistrano

TIME VALUE OF MONEY

General Instructions:

a. Each student must submit their answers individually.

b. Solutions to these problems are to be written on a clean sheet of paper (must be hand
written).
c. Scan or take a picture of your solution and upload your file in PDF format in Schoology
under Activity 4 (Module 2).
d. Make sure to upload a clear and readable file.
e. Submit on or before the due date since no extension shall be allowed.

PROBLEM 1
Lost Dutchman Mines, Inc., is considering investing in Peru. It makes a bid to the government to
participate in the development of a mine, the profit of which will be realized at the end of five
years. The mine is expected to produce $5 million in cash to Lost Dutchman Mines at that time.
Other than the bid at the outset, no other cash flows will occur, as the government will reimburse
the company for all costs. If Lost Dutchman requires a nominal annual return of 20 percent
(ignoring any tax consequences), what is the maximum bid it should make for the participation
right if interest is compounded (a) annually? (b) Semiannually? (c) Quarterly? (d) Continuously?

PROBLEM 2
“Want to win a million dollars? Here’s how . . . . One winner, chosen at random from all entries,
will win a $1,000,000 annuity.” That was the statement announcing a contest on the World Wide
Web. The contest rules described the “million-dollar prize” In greater detail: “40 annual payments
of $25,000 each, which will result in a total payment of $1,000,000. The first payment will be
made January 1; subsequent payments will be made each January thereafter.” Using a compound
annual interest rate of 8 percent, what is the present value of this “million –dollar prize” as of the
first installment on January 1?
ACTIVITY 4 MFCapistrano

PROBLEM 3
Establish loan amortization schedules for the following loans to the nearest cent:
Note: You may prepare the schedule using MS Excel.
a. A 36-month loan of $8,000 with equal installment payments at the end of each month.
The interest rate is 1 percent per month.
b. A 25-year mortgage loan of $184,000 at a 10 percent compound annual interest rate with
equal installment payments at the end of each year.

PROBLEM 4
You have borrowed $14,300 at a compound annual interest rate of 15 percent. You feel that you
will be able to make annual payments of $3,000 per year on your loan (Payments include both
principal and interest.) How long will it be before the loan is entirely paid off (to the nearest year)?