Assignment 1

Chapter 4: Time Value of Money

1) An investor (owner) has an option to purchase a tract of land that will be worth $10,000
in six years. If the value of the land increases by 10% each year, how much should the
investor be willing to pay now for this property?
2) The average price of gasoline in 2010 was $2.31 per gallon. In 2000, the average price
was $1.07. What was the average annual rate of increase in the price of gasoline over
this 12- year period?
3) What lumpsum amount of interest will be paid on a $10,000 loan was made on August
1, 2008, and repaid on November 1, 2012, with ordinary simple interest at 10% per
year?
4) Jim loans Juanita $12,000 with interest compounding at a rate of 6% per year. How
much money will Juanita owe Jim if she repays the entire loan at the end of five year?
5) A recent government study reported that a college degree is worth an extra $23000 per
year in income (A) compared to what a high school graduate makes. If the interest rate
(i) is 6% per year and you work for 40 years (N), what is the future compound amount
(F) of this extra income?
6) Make your best deal with us on a new automobile and we’ll change your oil for free for
as long as you own the car!” If you purchase a car from this dealership, you expect to
have four free oil changes per year during the five years you keep the car. Each oil
change would normally cost you $30. If you save your money in a mutual fund earning
2% per quarter , how much are the oil changes worth to you at the time you buy the
car?
7) You borrow $15000 from your credit union to purchase a used car. The interest rate on
your loan is 0.25% per month and you will make a total of 36 monthly payments. What
is your monthly payment?
8) “If you are 20 years of age and save $1 each day for the rest of your life , you can
become a millionaire.” Let’s assume that you are live to age of 80 and the annual
interest rate (i) is 10%. Under these specific conditions, you compute the future
compound amount (F).
9) Your company has a $100,000 loan for a new security system it just bought. The annual
payment is $8880 and the interest rate is 8% per year for 30 years. Your company
decides that it can afford to pay $10,000 per year. After how many payment will the
loan be paid off?
10) A credit card company wants your business. If you accept your offer and use their card,
they will deposit 1% of your monetary transactions into a saving accounts that will earn
a guaranteed 5% per year. If your annual transactions total an average of $20,000, how
much will you have in this savings plan after 15 years.
11) Frank has been making annual payments of $2,500 to repay of a college loan. He wishes
to pay off the loan immediately after having made an annual payment, and he has four
payments on the loan remaining. With an annual compound interest rate of 5%, how
much should Frank pay?
12) Twelve payments of $10,000 each are to be repaid monthly at the end of each month.
The monthly interest rate is 2%.
a. What is the present equivalent (i.e. P0) of these payments?
b. Repeat Part (a) when the payments are made at the beginning of the month. Note
that the present equivalent will be at the same time as the first monthly payment.
 c. Explain why the present equivalent amounts in Parts (a) and (b) are different.
13) When you were born, your grandfather established a trust fund for you in the Cayman
Islands. The account has been earning interest at the rate of 10% per year. If this account
will be worth $100, 000 on your 25th birthday, how much did your grandfather deposit
on the day you were born?
14) Every year you deposit $2,000 into your account that earns 2% interest per year. Wat
will be the balance of your account immediately after the 30th deposit?
15) Two receipts of $1,000 each are desired at the EOYs 10 and 11. To make these receipts
possible, four EOY annuity amounts will be deposited in a bank at EOYs 2, 3, 4 and 5.
The bank ‘s interest rate i is 12% per year.
a) Draw a cash flow diagram for this situation.
b) Determine the value of A that establishes equivalences in your cash flow diagram
c) Determine the lump-sum value at the end of year 11 of the completed cash flow
diagram based on your answers to Part (a) and (b).
16) You have $10,000 to invest for two years. Your bank offers 5% interest, compounded
continuously for funds in a money account. Assuming no additional deposits or
withdrawals, how much money will be in that account at the end of two years?
17) Suppose that one has a present a loan of $1000 and desires to determine what equivalent
uniform EOY payments, A, could be obtained from it for 10 years if the nominal interest
rate is 20% compounded continuously.
18) An individual needs $12000 immediately as a down payment on a new home. Suppose
that he can borrow this money from his insurance company. He must repay the loan in
equal payments in every six months over the next eight years. The nominal interest rate
being charged is 7% compounded continuously. What is the amount of each payment?
19) Find the uniform annual amount that is equivalent to a uniform gradient series in which
the first year’s payment is $500, the second year’s payment is $600, the third year’s
payment is $700, and so on, and there is a total of 20 payments. The annual interest rate
is 8%.
20) For a repayment schedule that starts at EOY four at $Z and proceeds for years 4 through
10 at $2Z, $3Z, ….., what is the value of Z if the principal of this loan is $10,000 and
the interest rate is 7% per year? Use a uniform gradient amount (G) in your solution.
21) The heat loss through the exterior walls of a certain poultry processing plant is
estimated to cost the owner $3,000 next year. A salesman from Superfiber Insulation,
Inc., has told you, the plant engineer, that he can reduce the heat loss by 80% with the
installation of $18,000 worth of Superfiber now. If the cost of heat loss rises by $200
per year (uniform gradient) after the next year and the owner plans to keep the present
building for 15 more years, what would you recommend if the interest rate is 10% per
year?

Good Luck