ACF 103 – Fundamentals of Finance

Tutorial 2 - Questions
Chapter 3
1. What is the total present value of the following series of cash flows,
discounted at 10%?
End of year Cash flow
1 $1,000
2 1,000
3 -2,000
4 3,000

2. How long would it take for your money to triple if you invested it at 9%,
compounded annually?

3. At your brother's 15th birthday party, he asks you how much he would have to
deposit at the end of every month to finance a $4,250 motorcycle on his 18th
birthday. He plans to put the money in a 12% savings account that compounds
interest monthly.

Homework problem
4. Text book Ch 3 question # 9 (p.66)

5. Text book Ch 3 question # 12 (p.67)

6. Text book Ch 3 question # 13 (p.67)

7. It is January 1 and you have made a New Year's resolution to invest $2,000 in
an Individual Retirement Account (IRA) at the end of every year for the next
30 years. If your money is compounded at an average annual rate of 9%, how
much will you have accumulated at the end of 30 years?

8. Congratulations! You have just won first prize in a raffle and must choose
between $20,000 in cash today or an annuity of $5,000 a year for five years.
(The annuity payments would come to you at the end of each year.) Which of
these two choices is worth more, assuming a 7% discount rate? Show your
calculations.

9. Your aunt is bragging about the great investment she made in a house that she
bought 30 years ago for $20,000 and has just sold for $65,000.
a. Calculate the rate of return on this investment.
b. If the average annual rate of inflation has been 3.5% during this period,
was this "a great investment?" Explain.

10. Ms. Early Saver has decided to invest $1,000 at the end of each year for the
next 10 years, then she will just let the amount compound for 40 additional
years. Her brother, Late Saver, has a different investment program: He will
invest nothing for the next 10 years, but will invest $1,000 per year (at the end
of each year) for the following 40 years. If we assume an 8% rate of return,
compounded annually, which investment program will be worth more 50 years
from now?

ACF 103 Haut 2015 Tutorial 2 1

Homework problem
11. Text book Ch 3 question # 1 (p.65)

12 Text book Ch 3 question # 2 (p.66)

13. Text book Ch 3 question # 4 (p.66)

14. Text book Ch 3 question # 5 (p.66)

ACF 103 Haut 2015 Tutorial 2 2