Problem
1. Suppose you buy a house today with a price of $25,000 and
Chapter 4
Practice Problems – TIME VALUE OF
MONEY APPLICATIONS
Problem
3. What is the present value of an annuity of $10,000 to be received at
the end of each year for 10 years given a 10 percent discount rate?
4. Suppose you plan to get a $9,000 loan from a furniture dealer at 18%
annual interest with annual payments that you will pay off in over five
years. What will your annual payments be on this loan?
you plan to pay it within the next 6 years. If you are going to
make equal annual end-of-year payments to an investment
account that pays 7%, how big do these annual payments
need to be?
2. If you can earn 12% on your investments, and you would like
to accumulate $100,000 for your child’s education at the
end of 18 years, how much must you invest annually to
reach your goal?
Problem
5. You have just found the perfect home. However, in order to
buy it, you will need to take out a $300,000, 30-year mortgage at
an annual rate of 6 percent. What will your monthly mortgage
payments be?
 Amortized Loans with Monthly Payments
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 Problem Problem

6. What is the present value of a perpetuity of $500 paid annually
discounted back to the present at 8 percent?
7. What is the present value of stream of payments equal to
$90,000 paid annually and discounted back to the present at 9
percent
8. a. An investment is expected to pay returns that start with
1.000 € in year 1 and later increase by 5 % per year. What is the
present value of that investment assuming a discount rate of
10 %?
b. What happens to the present value if the payment of the first
return is delayed until year 3?

Problem
9. You plan to retire in 40 years and expect to need 800.000 € for
living after retirement.
a. How much would you need to save per year to achieve this
goal? Assume an interest rate of 6 %.
b. What happens if the interest rate drops to 5 %?
Problem 10
Consider a five year investment whose cash flow consequences
are summarized below.
Cash Inflows: The investment will bring $300 cash inflow each year, for
years 1 - 5.
Cash outflows: The initial cost of the investment is a cash outflow of
$800 in year 0, followed by a cost (outflow) of $150 in year 1. There are
no expected costs in years 2 - 5.

When does payback occur?

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Problem 11 Problem 12

Company C is planning to undertake another project requiring Suppose you are looking at a new project and you have estimated the
initial investment of $50 million and is expected to generate $10 following cash flows:
million in Year 1, $13 million in Year 2, $16 million in year 3, $19
Year 0: CF = -165,000
million in Year 4 and $22 million in Year 5. Calculate the payback
value of the project. Year 1: CF = 63,120;

Year 2: CF = 70,800;

Year 3: CF = 91,080;

Your required return for assets of this risk is 12%.

How would you go about deciding whether to accept this

project or not?
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Problem 13 Problem 14

Eastern Express is considering a project with an initial
investment of $218,400. Clyde, the general manager, estimates
the project will generate additional revenues of $76,200 a year
for the next 4 years. How much value will this project add to the
firm if the required rate of return is 15.4 percent?
You need to borrow $2,500 quickly and Slimey Joe, the
neighborhood loan shark, will give it to you if you promise to
repay him $300 a month for the next year. Suppose that Joe's
cost of funds is 2 percent per month. From Joe's point of view,
what is the net present value of this deal?

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Problem 15

California Squeaker is considering creating a new website at a

cost of $526,000. The website will provide the latest news and
gossip from around the state for an annual fee per subscriber of
$8.95 a year. The company expects to collect fees totaling
$44,750 in year 1, $89,500 in year 2, and $304,300 per year for
years 3 through 5. After year 5, the company believes the
website will be worthless due to technological advancements.
What is the potential value to the firm from this project given a
16 percent discount rate?

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