6-1 ture value 6-2 present value 6-3 eet so to excing a nancial goal 6-5 sfetve rate of interest 6-6 store value of an annuity 6-7 lue of an annuity due 6-8 present and future value of a cash flow stream satu 6-9 loan amortization and effective interest rate 6-10 Growth rates 6-11 Expected rate of return 6-12 lective rate of interest 6-13 ‘ “ssed ump sum payment bank p setr Wnat nominal, or quoted, oF AFIC rate nu. osit $10,000 in a ca money will be in your account after § sat What is the present value of a secur that you can pays 10 percent interest annually, how much ity that promises to pay you $5,000 in 20 years? Assume ‘ou Were to invest in other securities of equal risk. Ifyou deposit money today into an account that for you to double your money? John Roberts has $42,180.53 in J as $42, a brokera $5,000 to the account at the end of every year return of 12 percent. If John’s goal is to accumu will it ake for John to reach his goa ae — repamning to retire in 18 years. They currently have $250,000, and they would when they retire. Wh: i ’ What annual rate of interest would they on their $2: aC their $250,000 in order to reach their goal, assuming they save no more money What is the future value ofa 5 The rate of interest is 7 percent. What is the future value of a 5-year annuity due that promises to ps sume that all payments are reinvested at 7 percent a year, until Yea h of th 1s. The investment will then end of Y nd $500 at the end of Year 6. If estment is 8 percent, what is its present value? What is its 117 percent if y it take pays 6.5 percent interest, how long wil unt, and he plans to contribute an additional he brokerage account has an expected annwal late $250,000 in the account, how many years F ordina annuity that promises to pay you $300 each year? you $300 each year? As- An investment pays you $100 at the end of pay you $200 at the end of Year 4, $300 at th the interest rate earned on th future val You are thinking about buying a car, and a local bank is willing to lend you $20,000 to buy the car. Under the terms of the loan, it will be fully amortized over 5 years (60 months), and the nominal rate of interest will be 12 percent, with interest paid monthly. What would be the monthly payment on the loan? What would be the effective rate of interest on the loan? The problems included in this section exam problems. Shalit Corporation’ 2002 sales were S12 milion. Sales were $6 million 5 years earlier (in 1997). To the nearest percentage point, at what rave have sales been grow 1 Suppose someone eafeulated the sales growth for Shalit Corporation in part a as follows aeaees eal in 3 years. This represents a grossth of 100 pereent in $ years, so, dividing 100 percent by 5, we find the growth rate co be 20 percent per year’ Explain what is wrong with this calculation. stant nt ; is ests $4 million to clear a tact of land and co set out some young pine eee oes wil at ion ve Weshingeon-Atlantie plans tosell de for. scan expected a ati Washington-Adntc’ expected race of return? A mortgage company year for 30 years. What i To complete your last year in b $10,000 per year for 4 years, sta mrerest rate is the mortgage company charging you? school and then go through law school, you will need fe next year (hat is, you will need to withdraw the fist exam-type propiems | 253e offers to put you through school, 3 Your rich uncle oP ged annaly, astm of mone tbe 100 one year from today)- interest, compounded annually, a su 1ONeY thar Ma Spon Dank ving? erent 90 each. His deposit willbe made today yg fictent to provide the # payments 2 How lige mus he depot PS rly afer you mae the Fst Withdaygs b, How much will be in the accou an to make deposits of $1,250 (000. To do so, you pla ; 270 ber Yeas 6-14 You need to ee a year from today, in fl Cod oa at pays 12 percent Al Reaching 2 financial goal the frst payment being made aye Fe OT i less than Sl. is needed gt est, compounded ana wow twill take you to reach your $10,000 goal, ang in out to, ,( low “ will the last deposit be ae wi er nh ge of ig i on Th a a fi or hus offered him three possible contracts. Ea e 8 lst for 4 yea EET OF Tr Med and spi athe en ofeach year. The terms of each of con are listed below: 1 CONTRACT 2 CONTRACT 3 Gunes «PAYMENTS. PAYMENTS, Year 1 $3 million $2 million $7 million Year 2 3 million 3 million 1 million Year 3 3 million 4 million 1 million Year 4 3 million 5 million 1 million ‘The quarterback discounts all cash flows at 10 percent. Which of the three contract oy him the most value? 6-16 What is the present value of a perpetuity of $100 per year if the appropr Present value of a perpetuity 7 percent? If interest rates in general were to double and the appropriate 14 percent, what would happen to the present value of the perpetu Assume that you inherited some money. A friend of yours is working as an unpaid intem st local brokerage firm, and her boss is selling some securities that call for 4 payments, $50 st end of each of the next 3 years, plus a payment of $1,050 at the end of Year 4. Your fiend sq, she can get you some of these securities at a cost of $900 each. Your money is now invested a bank that pays an 8 percent nominal (quoted) interest rate, but with quarterly compouncg You regard the securities as being just as safe, and as liquid, as your bank deposit, s your quired effective annual rate of return on the securities is the same as that on your bank depot You must calculate the value of the securities to decide whether they are a good invest. What is their present value to you? 6-18 Assume that your aunt sold her house on December 31, and that she took a morgage in be Loan amortization amount of $10,000 as part of the payment. ‘The mortgage has a quoted (or nominal) its rate of 10 percent, but it calls for payments every 6 months, beginning on June 30, and te mortgage is to be amortized over 10 years. Now, one year later, your aunt raust file Schedule B of her tax return with the IRS, informing them of the interest that was included in the 2 pa ments made during the year. (This interest will be income to your aunt and a deduction buyer of the house.) ‘To the closest dollar, what is the total smoune of interest that was pid during the first year? 6-19 Your company is Loan amortization ate discount rei ount rate roe, 6-17 PV and effective annual rate planning to borrow $1,000,000 on a § amortized term loan. What fraction of th represent repayment of principal? 6-20 a. Te is now January 1, 2003. You pl Nonannual compounding with the frst payment being cent, but uses semiannual co: b. Ten years from today you im '-year, 15%, annual payment, LE} payment made at the end of the second ye’ lan to make 5 deposits of $100 each, one every 6 a mace today. If the bank pays a nominal interest rate of 2 pounding, how much will be in your account after 10)e2 i mst make a payment of $1,432.02. To prepae fortis you a make ‘ equal deposits, beginning today and for the next 4 quarters, ae seh ays.a nominal interest rate of 12 percent, quareerly ling. How large mus Pays nominal nt Percent, quarterly compounding. How large ‘ 6-21 As the manager of Oaks Mall Jewelry, you w: n ving customers 3 Nominal rate of return in which to pay. Howe will Rave to boro fon ee Ee unt ‘es you will have to borrow from the bank to carry the act 254 | CHAPTER 6» TIME VALUE OF Money6-23 pet an 20s 6-24 eof annuity 6-25 present value 6-26 Future value 6-27 ‘upied annuity payment 6-28 Notaneval compounding 6-29 "thing a financial goal OL ceivable. The bank will cha svant to quote a nominal rates will exactly cover your finay credit customers? [Assume that your father is now 5 pects to live for 25 years after he eae ota he plans to retire in 10 years and that he ex- reer ath the ee ater Be rere ha una ne 83. He vats Mgxed retirement in- car he sea ela parchasng power at the time he retires as $40,000 has today (he real ins tag felt OF hs retirement income wl deine yearby year after he retires). His ditional annual payments. Tee E pay Joyous from today, and he will then get 24 ad- ccurrently has $100,000 sav is expected to be 5 percent per Year from today forward; he year, anntal compouni vaaeaupiand he expects to carta returh on his savings of percent per hrext 10 years (with deposits being made st dollar, how much must he save during each of the ‘ posits being made at the end of each year) to meet his retirement goal? Aen last week’ Florida lostery was eximated to be worth $35 milion I you were Tucks enough town, the sate will ply you S1.75 milion per year over the next 20 years. sume that the fist installment f received immediately. a. Hfinte es are 8 percent, what is the present v 1e prize? x Hiscee cafe ce te er ” your answers change if the payments were received at the end of each year? a i Xe 4 nominal 15 prent, but with monthly compounding, YOU cing costs. Wher y all of whom are expected to pay on time) that - What nominal annual rate should you quote to your 5 old and wants to begin saving for ret 40 y fants in saving tirement. You advise the client £0 pat $5,000 a year into the stock market. You artic ih the markers return il be on average, 12 erent ea. Assn the invesment willbe made at the end of the year. By How much will she have by age 702 Cael Your client is 40 You are serving on a jury. A plaintiff is suing the city for injuries sustained after falling down, ‘that it will be 5 years before the plaintiff an uncovered manhole, In the trial, doctors testifies ieable to return to work, The jury has already decided in favor ofthe plaintiff, and has decided to geant the plaintiff an award to cover the following items: {1) Recovery of ? years of hack-pay ($34,000 in 2001, and $36,000 in 2002). Assume that it ig December $1, 2002 toe shat all salary is received at year end. This recovery should include the time value of money. 2) The present value of 5 years of future salary (2003-2007). would increase at a rate of 3 percent a year. (3) $100,000 for pain and suffering. 4) $20,000 for court costs. ‘Assume an interest rate of 7 percent. What shoul ). Assume that the plaintiff’ salary Id be the size of the settlement? YYou just started your firs job, and you want to buy a house within 3 years. You are currently ata for the down payment. You plan to save $5,000 the fist year. You also anticipate that Spe fount you save each year will rise by 10 percent a year as your salary increases over Hi, dae assumed 0 he 7 percent, and all savings occur at year end. How much money will you have for a down payment in 3 years? “\ 15-year security has a price of $340,689. The security pays $50 at the end of each of the aoe ee eed then it pays a different fixed cash flow amount at the end of each of the following 10 years. Interest rates are 9 percent. ‘What is the annual cash flow amount between Years 6 and 15? An investment pays $20 semiannually for the next 2 years. The investment has 7 percent An investment Pa and interest s compounded quarterly. What isthe furre value of the investment? Taiks snd Katherine have both been given $30,000 by their grandparents today on their 25th They want to save for their farure and have aspirations of one day being million ‘h woman plans to make annual Contributions on her birthday, beginning next year. rika and Katherine have ‘each opened investment accounts at the First ‘National Bank and ee National Bank, respectively, and they expect 19 7 nominal returns of 8 and 9 per- sarertespectvely. Erika has already decided to depos 85,00 cach yea nt he nvesment ‘Catherine is unsure of the amount she will Sepeanpal ion ww long wi ‘before she reaches her inves ae al take Erika before she reaches er ineese Bor oy much sooner b. If Katherine decides to make the same annul would she reach the investment goal? account, while Cs EKA