Tutorial questions

FBF

25300

Tutorial 4 Time Value of Money 2

1.

Aunty Helen spends $200 a month on cigarettes. How much would she have after 10 years if she
saved this money instead in a bonus saver account paying 4.8% p.a. compounding monthly?

2.

Gabrielle has just won $2.5 million in the state lottery. She is given the option of receiving a total
of $1.3 million now or she can elect to be paid $100,000 at the end of each of the next 25 years. If
Gabrielle can earn 5% annually on her investments, from a strict economic point of view which
option should she take?

3.

A man deposits $500 at the end of each year for 5 years and then $800 at the end of each year for
8 years. Find the future value of these deposits (at the end of the 13 years) if interest is 5% p.a.

4.

How much do you have to deposit today so that beginning eleven years from now you can
withdraw $10,000 a year for five years (periods 11 to 15) plus an additional amount of $20,000 in
that last year (period 15)? Assume an interest rate of 7% p.a.

5.

With an 8% pa interest rate, calculate the present value of the following streams of payments:
(a)
$1200 per year forever, with the first payment at the end of the first year
(b)
$1200 per year forever, with the first payment today
(c)
$1200 per year forever, with the first payment in 5 years

6.

You are a financial planner and your client, Fast Eddy, wishes to plan for his future. Fast Eddy
wants to receive a payment of $120,000 each year for twenty years to fund his retirement, with
the first $120,000 payment to be received on 1 August 2027 and the final payment on 1 August
2046.
You recommend that Fast Eddy makes a series of annual equal-sized deposits into his
superannuation fund. The first deposit will be made on 1 August 2015 and the final deposit will be
on 1 August 2026. The superannuation fund pays a constant return of 8% pa.
What is the amount of the equal-sized deposits that Fast Eddy must make into his superannuation
fund? (Answer: $62,084.09)

7.

Lucy and Malcolm purchase a $700,000 house by paying a $250,000 deposit and borrowing the
balance. Their loan will be repaid with monthly payments over a twenty year term at a rate of 6%
p.a. compounding monthly.
(a) How much is their monthly repayment?
(b) Complete the loan amortisation schedule for the first three months.
(c) After three months, the interest rate on their variable rate loan increases to 6.6% p.a.
compounding monthly. What will their new monthly repayment be?

(Answers: 1. $30,726.39, 2. $1,409,394.46, 3. $11,721.22, 4. $28,092.24, 5. (a) $15,000, (b) $16,200, (c)
$11,025.45, 6. $62,084.09, 7. (a) $3,223.94, (b) closing principal of $447,063.55, (c) $3,380.10)