CLASS ACTIVITY 2 FOF Marks 5 (2.

5 Each
Question)

Group 1
1. Your client is 40 years old; and she wants to begin saving for retirement, with the first
payment to come one year from now. She can save $5,000 per year; and you advise her to
invest it in the stock market, which you expect to provide an average return of 8% in the
future. If she follows your advice, how much money will she have at 65? How much will she
have at 70?

2. Suppose you borrowed $25,000 at a rate of 8% and must repay it in 5 equal installments at
the end of each of the next 5 years. How much interest would you have to pay in the first
year and second year? Please prepare complete schedule.

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each

Question)

Group 2
1. You own an oil well that will pay you $35,000 per year for 8 years, with the first payment
being made today. If you think a fair return on the well is 7.5%, how much should you ask if
you decide to sell it?
2. Noor wants to take a trip to England in 3 years, and saving to pay for the trip. Today (8/1/05)
she made an initial deposit of $1,000. Her plan is to add $2,000 to the account one year from
now (8/1/06) and another $3,000 to the account two years from now (8/1/07). The account
has a nominal interest rate of 7%, but the interest is compounded quarterly. How much will
Noor have in the account three years from today (8/1/08)?

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each

Question)

Group 3
1. You are considering buying a new, $15,000 car, and you have $2,000 to put toward a down
payment. If you can negotiate a nominal annual interest rate of 10% and finance the car over
60 months, what are your monthly car payments? please prepare schedule for 10 months.
2. Your bank account pays a nominal interest rate of 6%, compounded daily. Your plan is to
deposit $500 in the account today, and deposit $1,000 in the account at the end of each of the
next three years. How much will you have in the account at the end of three years, after
making your final deposit?

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each Question)

Group 4
1. You want to go to grad school 3 years from now, and you can save $5,000 per year,
beginning immediately. You plan to deposit the funds in a mutual fund which you expect to
return 9% per year. Under these conditions, how much will you have just after you make the
3rd deposit, 3 years from now?

2. An investment costs $1,000 (CF at T = 0) and is expected to produce cash flows of $50 at the
end of each of the next 5 years, then an additional lump sum payment of $1,000 at the end of
the 5th year. What is the expected rate of return on this investment.

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each Question)

Group 5

1. Sara wants to take a trip to UK in 3 years, and saving to pay for the trip. Today (8/10/22) she
made an initial deposit of $1,000. Her plan is to add $2,000 to the account one year from
now (8/10/23) and another $3,000 to the account two years from now (8/10/24). The account
has a nominal interest rate of 7%, but the interest is compounded quarterly. How much will
Sara have in the account three years from today (8/10/25)?

2. You want to buy a condo 5 years from now, and you plan to save $3,000 per year, beginning
one year from today. You will deposit the money in an account that pays 6% interest. How
much will you have just after you make the 5th deposit, 5 years from now?

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each Question)

Group 6
1. Your sister turned 30 today, and she is planning to save $3,000 per year for retirement, with
the first deposit to be made one year from today. She will invest in a mutual fund, which she
expects to provide a return of 10% per year. She plans to retire 35 years from today, when
she turns 65, and she expects to live for 30 years after retirement, to age 95. Under these
 assumptions, how much can she spend in each year after she retires? Her first withdrawal
will be made at the end of her first retirement year.

2. Bank A offers to lend you $10,000 at a nominal rate of 6%, simple interest, with interest paid
monthly. Bank B offers to lend you the $10,000, but it will charge 7%, simple interest, with
interest paid at the end of the year. What is the difference in the effective annual rates
charged by the two banks?

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each

Question)
Group 7
1. You want to go to grad school 3 years from now, and you can save $5,000 per year,
beginning immediately. You plan to deposit the funds in a mutual fund which you expect to
return 9% per year. Under these conditions, how much will you have just after you make the
3rd deposit, 3 years from now?

2. At a rate of 8%, what is the future value of the following cash flow stream? $0 at Time 0;
$100 at the end of Year 1; $300 at the end of Year 2; $0 at the end of Year 3; and $500 at the
end of Year 4?

CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each

Question)
Group 8
1. You own an oil well that will pay you $35,000 per year for 8 years, with the first payment
being made today. If you think a fair return on the well is 7.5%, how much should you ask if
you decide to sell it?

2. Your sister turned 30 today, and she is planning to save $3,000 per year for retirement, with
the first deposit to be made one year from today. She will invest in a mutual fund, which she
expects to provide a return of 10% per year. She plans to retire 35 years from today, when
she turns 65, and she expects to live for 30 years after retirement, to age 95. Under these
assumptions, how much can she spend in each year after she retires? Her first withdrawal
will be made at the end of her first retirement year.
CLASS ACTIVITY 2 FOF Marks 5 (2.5 Each
Question)
Group 9
1. Your client is 40 years old; and she wants to begin saving for retirement, with the first
payment to come one year from now. She can save $5,000 per year; and you advise her to
invest it in the stock market, which you expect to provide an average return of 8% in the
future. If she follows your advice, how much money will she have at 65? How much will she
have at 70?

2. Suppose you borrowed $25,000 at a rate of 8% and must repay it in 4 equal installments at
the end of each of the next 4 years. How large would your payments be?(schedule)

CLASS ACTIVITY 2 FOF

Marks 5 (2.5 Each Question)
Group 10

1. Noor wants to take a trip to England in 3 years, and saving to pay for the trip. Today
(8/1/05) she made an initial deposit of $1,000. Her plan is to add $2,000 to the account one
year from now (8/1/06) and another $3,000 to the account two years from now (8/1/07).
The account has a nominal interest rate of 7%, but the interest is compounded quarterly.
How much will Noor have in the account three years from today (8/1/08)?

2. Bank A offers to lend you $10,000 at a nominal rate of 6.5%, compound interest, with
interest paid monthly. Bank B offers to lend you the $10,000, but it will charge 7.5%,
compound interest, with interest paid at the end of the year. What is the difference in the
effective annual rates charged by the two banks?