Ch05 06

5.
1 Future value: Chuck Tomkovick is planning to invest $25,000 today in a mutual

fund that will provide a return of 8 percent each year. hat will !e the value of the
investment in "0 years#
LO 2
Solution:
0 5 years
$% & $25,000 '% & #

(mount invested today & $% & $25,000
)eturn e*pected from investment & i & 8+
,uration of investment & n & "0 years
%alue of investment after "0 years & '%
"0
$53,973.12
+
"0 n
"0
- 08 . " . 000 , 25 $ - " . $% '% i
5.2 Future value: Ted )ogers is investing $/,500 in a !ank C, that pays a 0 percent
annual interest. 1ow much will the C, !e worth at the end of five years#
LO 2
Solution:
0 5 years
$% & $/,500 '% & #

(mount invested today & $% & $/,500
,uration of investment & n & 5 years
%alue of investment after 5 years & '%
5
$10,036.69
+
5 n
5
- 00 . " . 500 , / $ - " . $% '% i
5.3 Future value: 2our aunt is planning to invest in a !ank deposit that will pay /.5
percent interest semiannually. 3f she has $5,000 to invest, how much will she have at
the end of four years#
LO 2
Solution:
0 4 years
$% & $5,000 '% & #

)eturn e*pected from investment & i & /.5+
're5uency of compounding & m & 2
4
$6,712.35

,
_
,
_
8
4 2 mn
4
- 06/5 . " . 500 , / $
2
0/5 . 0
" 500 , / $
m
" $% '%
i
5.4 Future value7 8ate 9den received a graduation present of $2,000 that she is planning
on investing in a mutual fund that earns 8.5 percent each year. 1ow much money can
she collect in three years#
LO 2
Solution:
0 6 years
$% & $2,000 '% & #

(mount 8ate invested today & $% & $2,000
)eturn e*pected from investment & i & 8.5+
6
$2,554.5
+
6 n
6
- 085 . " . 000 , 2 $ - " . $% '% i
5.5 Future value: 2our !ank pays 5 percent interest semiannually on your savings
account. 2ou don:t e*pect the current !alance of $2,/00 to change over the ne*t four
years. 1ow much money can you e*pect to have at the end of this period#
LO 2
Solution:
0 4 years
$% & $2,/00 '% & #

(mount invested today & $% & $2,/00
4
$3,29.69

,
_
,
_
8
4 2 mn
4
- 025 . " . /00 , 2 $
2
05 . 0
" /00 , 2 $
m
" $% '%
i
5.6 Future value7 2our !irthday is coming up, and instead of any presents, your parents
promised to give you $",000 in cash. ;ince you have a part time <o! and thus don:t
need the cash immediately, you decide to invest the money in a !ank C, that pays 5.2
percent 5uarterly for the ne*t two years. 1ow much money can you e*pect to gain in
this period of time#
LO 2
Solution:
0 2 years
$% & $",000 '% & #

(mount invested today & $% & $",000
2
$1,10.6

,
_
,
_
8
2 4 mn
2
- 0"6 . " . 000 , " $
4
052 . 0
" 000 , " $
m
" $% '%
i
5.7 !ulti"le #o$"oun%in& "erio%'7 'ind the future value of an investment of $"00,000
made today for five years and paying 8./5 percent for the following compounding
periods7
a. =uarterly
(. >onthly
#. ,aily
%. Continuous
LO 2
Solution:
0 5 years
$% & $"00,000 '% & #

(mount invested today & $% & $"00,000
)eturn e*pected from investment & i & 8./5+
a. 're5uency of compounding & m & 4
5
4 $154,154.2
,
_
,
_
20
5 4 mn
5
- 02"8/5 . " . 000 , "00 $
4
08/5 . 0
" 000 , "00 $
m
" $% '%
i
(. 're5uency of compounding & m & "2
5
7 $154,637.3
,
_
,
_
00
5 "2 mn
5
- 00/2? . " . 000 , "00 $
"2
08/5 . 0
" 000 , "00 $
m
" $% '%
i
#. 're5uency of compounding & m & 605
5
1 $154,74.9
,
_
,
_
"825
5 605 mn
5
- 00024 . " . 000 , "00 $
605
08/5 . 0
" 000 , "00 $
m
" $% '%
i
%. 're5uency of compounding & m & Continuous
5
3 $154,3.0

5488606 . " 000 , "00 $
e 000 , "00 $ e $% '%
5 08/5 . 0
5
in
5. )ro*t+ rate': >att >urton, an outfielder for the Chicago Cu!s, is e*pected to hit 25
home runs in 2008. 3f his home run hitting a!ility is e*pected to grow !y "2 percent
every year for the ne*t five years, how many home runs is he e*pected to hit in 20"6#
LO 4
Solution:
0 5 years
$% & 25 '% & #

@um!er of home runs hit in 2008 & $% & 25
9*pected annual increase in home runs hit & i & "2+
Arowth period & n & 5 years
@o. of home runs after 5 years & '%
5
run' +o$e 44
+
5
5
- "2 . " . 25 - " .
n
i PV FV
5.9 ,re'ent value: )oy Aross is considering an investment that pays /.0 percent. 1ow
much will he have to invest today so that the investment will !e worth $25,000 in si*
years#
LO 3
Solution:
0 0 years
$% & # '% & $25,000

5
& $25,000
(mount to !e invested today & $%
$16,10.92
0 n
n
- 0/0 . " .
000 , 25 $
- " .
'%
$%
i
5.10 ,re'ent value7 >aria (ddai has !een offered a future payment of $/50 two years
from now. 3f her opportunity cost is 0.5 percent compounded annually, what should
she pay for this investment today#
LO 3
Solution:
0 2 years
$% & # '% & $/50

2
& $/50
( )
$661.24
2 n
n
- 005 . " .
/50 $
"
'%
$%
i
5.11 ,re'ent value: 2our !rother has asked you for a loan and has promised to pay !ack
$/,/50 at the end of three years. 3f you normally invest to earn 0 percent, how much
will you !e willing to lend to your !rother#
LO 3
Solution:
0 6 years
$% & # '% & $/,/50

Boan repayment amount after 6 years & '%
6
& $/,/50
( )
$6,507.05
6 n
n
- 00 . " .
/50 , / $
"
'%
$%
i
5.12 ,re'ent value: Tracy Chapman is saving to !uy a house in five years time. ;he plans
to put down 20 percent down at that time, and she !elieves that she will need $65,000
for the down payment. 3f Tracy can invest in a fund that pays ?.25 percent annually,
how much will she need to invest today#
LO 3
Solution:
0 5 years
$% & # '% & $65,000

(mount needed for down payment after 5 years & '%
5
& $65,000
)eturn e*pected from investment & i & ?.25+
( )
$22,4.52
5 n
n
- 0?25 . " .
000 , 65 $
"
'%
$%
i
5.13 ,re'ent value7 2ou want to !uy some deep discount !onds that have a value of
$",000 at the end of seven years. Conds with similar risk are said to pay 4.5 percent
interest. 1ow much should you pay for them today#
LO 3
Solution:
0 / years
$% & # '% & $",000

'ace value of !ond at maturity & '%
/
& $",000
(ppropriate discount rate & i & 4.5+
@um!er of years to maturity & n & / years.
$resent value of !ond & $%
( )
$734.3
/ n
n
- 045 . " .
000 , " $
"
'%
$%
i
5.14 ,re'ent value: 9liDa!eth ;weeney wants to accumulate $"2,000 !y the end of "2
years. 3f the interest rate is / percent, how much will she have to invest today to
achieve her goal#
LO 3
Solution:
0 "2 years
$% & # '% & $"2,000

(mount >s. ;weeney wants at end of "2 years & '%
"2
& $"2,000
3nterest rate on investment & i & /+
,uration of investment & n & "2 years.
$resent value of investment & $%
( )
$5,32.14
"2 n
n
- 0/ . " .
000 , "2 $
"
'%
$%
i
5.15 -ntere't rate: 2ou are in desperate need of cash and turn to your uncle who has
offered to lend you some money. 2ou decide to !orrow $",600 and agree to pay !ack
$",500 in two years. (lternatively, you could !orrow from your !ank that is charging
0.5 percent interest. ;hould you go with your uncle or the !ank#
LO 2
Solution:
0 2 years
$% & $",600 '% & $",500

(mount to !e !orrowed & $% & $",600
(mount to !e paid !ack after 2 years & '%
2
& $",500
3nterest rate on investment & i & #
,uration of investment & n & 2 years.
( )
7.42.

+
+
i
" "568 . "
"568 . "
$",600
$",500
- i " .
- " .
500 , " $
600 , " $
"
'%
$%
2
2
n
n
i
i
i
2ou should go with the !ank !orrowing.
5.16 /i$e to attain &oal7 2ou invest $"50 in a mutual fund today that pays ? percent
interest. 1ow long will it take to dou!le your money#
LO 1,2
Solution:
0 n years
$% & $"50 '% & $600

%alue of investment today & $% & $"50
3nterest on investment & n & ?+
'uture value of investment & '% & $600
@um!er of years to dou!le investment & n
0ear'

+
- 0? . " ln.
- 00 . 2 ln.
- 00 . 2 ln. - 0? . " ln.
00 . 2 "50 600 $ - 0? . " .
- 0? . " . "50 $ 600 $
- " .
n
n
i PV FV
n
n
n
n
-1/23!24-5/2
5.17 )ro*t+ rate: 2our 'inance te*t!ook sold 56,250 copies in its first year. The
pu!lishing company e*pects the sales to grow at a rate of 20 percent for the ne*t three
years and !y "0 percent in the fourth year. Calculate the total num!er of copies that
the pu!lisher e*pects to sell in years 6 and 4. ,raw a time line to show the sales level
for each of the ne*t four years.
LO 4
Solution:
@um!er of copies sold in its first year & $% & 56,250
9*pected annual growth in the ne*t 6 years & i & 20+
@um!er of copies sold after 6 years & '%
6
&
#o"ie' 92,016

+
6
n
n
- 20 . " . 250 , 56
- " . $% '% i
@um!er of copies sold in the fourth year & '%
4
#o"ie' 101,21
+ - "0 . " . 0"0 , ?2 - " . $% '%
n
n
i
0 6 4 years
6
$% & 56,250 ?2,0"0 "0,2"8 copies
5.1 )ro*t+ rate7 Cele!@av, 3nc., had sales last year of $/00,000, and the analysts are
predicting a good year for the start up, with sales growing 20 percent a year for the
ne*t three years. (fter that, the sales should grow "" percent per year for another two
years, at which time the owners are planning on selling the company. hat are the
pro<ected sales for the last year of the company:s operation#
LO 4
Solution:
0 " 2 6 4 5
years
6666
g
"
& 20+ g
2
& ""+
$% & $/00,000
'%&#
;ales of Cele!@av last year & $% & $/00,000
9*pected annual growth in the ne*t 6 years & g
"
& 20+
9*pected annual growth in years 4 and 5 & g
2
& ""+
;ales in year 5 & '%
5
.16 $1,490,34
+ +
2 6 2
2
6
" 5
- "" . " . - 20 . " . 000 , /00 $ - g " . - g " . $% '%
5.19 )ro*t+ rate7 2ou decide to take advantage of the current online dating craDe and
start your own e! site. 2ou know that you have 450 people who will sign up
immediately, and through a careful marketing research and analysis you determine
that mem!ership can grow !y 2/ percent in the first two years, 22 percent in year 6,
and "8 percent in year 4. 1ow many mem!ers do you e*pect to have at the end of
four years#
LO 4
Solution:
0 " 2 6 4 years
666
g
"E2
&2/+ g
6
&22+ g
4
&"8+
$% & 450 '% & #
@um!er of e! site mem!erships at t & 0 & $% & 450
9*pected annual growth in the ne*t 2 years & g
"E2
& 2/+
9*pected annual growth in years 6 & g
6
& 22+
9*pected annual growth in years 4 & g
4
& "8+
@um!er of mem!ers in year 4 & '%
4
$e$(er' 1,045
+ + + - "8 . " -. 22 . " . - 2/ . " . 450 - g " -. g " . - g " . $% '%
2
4 6
2
" 4
5.20 !ulti"le #o$"oun%in& "erio%'7 'ind the future value of an investment of $2,500
made today for the following rates and periods7
a. 0.25 percent compounded semiannually for "2 years
(. /.06 percent compounded 5uarterly for 0 years
#. 8.? percent compounded monthly for "0 years
%. "0 percent compounded daily for 6 years
e. 8 percent compounded continuously for 2 years
LO 2
Solution:
a.
$5,232.09

,
_
- 0?28 . 2 . 500 , 2 $
2
0025 . 0
" $% '%
"2 2
"2
(.
$3,934.4

,
_
- 4/08 . 2 . 500 , 2 $
4
0/06 . 0
" $% '%
0 4
"2
#.
$6,067.6

,
_
- 42/" . 2 . 500 , 2 $
"2
08? . 0
" $% '%
"0 "2
"2
%.
$3,374.51

,
_
- 64?8 . " . 500 , 2 $

605
0"0 . 0
" $% '%
6 605
"2
e.
$2,933.7

"/65 . " 500 , 2 $
e 000 , 6 $ e $% '%
2 08 . 0 in
6
5.21 )ro*t+ rate': Feni* Corp had sales of $656,800 in 2008. 3f it e*pects its sales to !e
at $4/0,450 in three years, what is the rate at which the company:s sales are e*pected
to grow#
LO 4
Solution:
;ales in 2008 & $% & $656,800
9*pected sales three years from now & $4/0,450
To calculate the e*pected sales growth rate, we set up the future value e5uation.
10.42.

+
+
+
" - 6404 . " . g
6404 . "
800 , 656 $
450 , 4/0 $
- g " .
- g " . 800 , 656 $ 450 , 4/0 $
- g " . $% '%
6
"
6
6
6
6
5.22 )ro*t+ rate: 3nfosys Technologies, 3nc., an 3ndian technology company reported a
net income of $4"? million this year. (nalysts e*pect the company:s earnings to !e
$".408 !illion in five years. hat is the company:s e*pected earnings growth rate#
LO 4
Solution:
9arnings in current year & $% & $4"?,000,000
9*pected earnings five years from now & $",408,000,000
To calculate the e*pected earnings growth rate, we set up the future value e5uation.
. 2 5 . 8
" - 5060 . 6 . g
5060 . 6
000 , 000 , 4"? $
000 , 000 , 408 , " $
- g " .
- g " . 000 , 000 , 4"? $ 000 , 000 , 408 , " $
- g " . $% '%
5
"
5
5
5
5

+
+
+
5.23 /i$e to attain &oal: Gephyr ;ales Company has currently reported sales of $"."25
million. 3f the company e*pects its sales to grow at 0.5 percent annually, how long
will it !e !efore the company can dou!le its sales# Hse a financial calculator to solve
this pro!lem.
LO 1,2
Solution:
2nter
6.5. 7$1.125 $2.250
1 i. ,!/ ,8 F8

5n'*er: 11 0ear'
5.24 /i$e to attain &oal: 2ou are a!le to deposit $850 into a !ank C, today, and you will
only withdraw the money once the !alance is $",000. 3f the !ank pays 5 percent
interest, how long will it take you to attain your goal#
LO 1,2
Solution:
(mount invested today & $% & $850
9*pected amount in the future & '% & $",000
3nterest rate on C, & i & 5+
To calculate the time needed to reach the target '%, we set up the future value
e5uation.
0ear' 3.3

+
- 05 . " ln.
- "/04 . " ln.
- "/04 . " ln. - 05 . " ln.
"/04 . "
850 $
000 , " $
- 05 . " .
- 05 . " . 850 $ 000 , " $
- " . $% '%
n
n
n
n
n
n
i
5.25 /i$e to attain &oal7 @eon Bights Company is a private company with sales of $".6
million a year. They want to go pu!lic !ut have to wait until the sales reach $2
million. $roviding that they are e*pected to grow at a steady "2 percent annually,
when is the earliest that @eon Bights can start selling their shares#
LO 1,2
Solution:
Current level of sales & $% & $",600,000
Target sales level in the future & '% & $2,000,000
$ro<ected growth rate & g & "2+
e5uation.
0ear' 3.

+
- "2 . " ln.
- 5685 . " ln.
- 5685 . " ln. - "2 . " ln.
5685 . "
00 , 600 , " $
000 , 000 , 2 $
- "2 . " .
- "2 . " . 000 , 600 , " $ 000 , 000 , 2 $
- g " . $% '%
n
n
n
6
n
n
5.26 ,re'ent value: Caroline eslin needs to decide whether to accept a !onus of $",?00
today or wait two years and receive $2,"00 then. ;he can invest at 0 percent. hat
should she do#
LO 3
Solution:
0 2 years
$% & $",?00 '% & #

(mount to !e received in 2 years & '%
2
& $2,"00
$resent value of amount today $% &
$1,6.99
2 n
2
- 00 . " .
"00 , 2 $
- " .
'%
$%
i
;ince the amount to !e received today .$",?00- is greater than the present value of the
$2,"00 to !e received in two years, >s. eslin should choose to receive the amount
of $",?00 today
5.27 !ulti"le #o$"oun%in& "erio%'7 'ind the present value of $6,500 under each of the
following rates and periods.
a. 8.?+ compounded monthly for five years.
(. 0.0+ compounded 5uarterly for eight years.
#. 4.6+ compounded daily for four years.
%. 5./+ compounded continuously for three years.
LO 2
Solution:
0 n years
$% & # '% & $6,500

a. )eturn e*pected from investment & i & 8.?+
're5uency of compounding & m & "2
$resent value of amount & $%
$2,246.57
,
_
,
_

55/? . "
500 , 6 $
"2
08? . 0
"
500 , 6 $
m
"
'%
$%
5 "2 mn
5
i
(. )eturn e*pected from investment & i & 0.0+
$resent %alue of amount & $%
$2,073.16
,
_
,
_

0882 . "
500 , 6 $
4
000 . 0
"
500 , 6 $
m
"
'%
$%
8 4 mn
8
i
#. )eturn e*pected from investment & i & 4.6+
$2,946.96
,
_
,
_

"8// . "
500 , 6 $
605
046 . 0
"
500 , 6 $
m
"
'%
$%
4 605 mn
4
i
%. )eturn e*pected from investment & i & 5./+
're5uency of compounding & m & Continuous
$2,949.

"805 . "
500 , 6 $
e
500 , 6 $
e
'%
$%
6 05/ . 0
6
in
5.2 !ulti"le #o$"oun%in& "erio%'7 ;amantha is looking to invest some money, so that
she can collect $5,500 at the end of three years. hich investment should she make
given the following choices7
a. 4.2+ compounded daily
(. 4.?+ compounded monthly
#. 5.2+ compounded 5uarterly
%. 5.4+ compounded annually
LO 2
Solution:
0 6 years
$% & # '% & $5,500

a. )eturn e*pected from investment & i & 4.2+
$4,4.92
,
_
,
_

"646 . "
500 , 5 $
605
042 . 0
"
500 , 5 $
m
"
'%
$%
6 605 mn
6
i
;amantha should invest $4,848.?2 today to reach her target of $5,500 in three years.
(. )eturn e*pected from investment & i & 4.?+
$4,749.54
,
_
,
_

55/? . "
500 , 5 $
"2
04? . 0
"
500 , 5 $
m
"
'%
$%
6 "2 mn
6
i
;amantha should invest $4,/4?.54 today to reach her target of $5,500 in three years.
#. )eturn e*pected from investment & i & 5.2+
$4,710.31
,
_
,
_

"0// . "
500 , 5 $
4
052 . 0
"
500 , 5 $
m
"
'%
$%
6 4 mn
6
i
;amantha should invest $4,/"0.6" today to reach her target of $5,500 in three years.
%. )eturn e*pected from investment & i & 5.4+
're5uency of compounding & m & "
$4,697.22
+
6 6
6
- 054 . " .
500 , 5 $
- " .
'%
$%
i
;amantha should invest $4,0?/.22 today to reach her target of $5,500 in three years.
;amantha should invest in choice ,.
54851924
5.29 2ou have $2,500 you want to invest in your classmate:s startEup !usiness. 2ou
!elieve the !usiness idea to !e great and hope to get $6,/00 !ack at the end of three
years. 3f all goes according to the plan, what will !e your return on investment#
LO 2,3
Solution:
0 6 years
$% & $2,500 '% & $6,/00

(mount invested in pro<ect & $% & $2,500
9*pected return three years from now & '% &$6,/00
To calculate the e*pected rate of return, we set up the future value e5uation.
13.96.

+
+
+
"6?0 . 0 " - 4800 . " .
4800 . "
500 , 2 $
/00 , 6 $
- " .
- " . 500 , 2 $ /00 , 6 $
- " . $% '%
6
"
6
6
6
6
i
i
i
i
5.30 $atrick ;eeley has $2,400 that he is looking to invest. 1is !rother approached him
with an investment opportunity that could dou!le his money in four years. hat
interest rate would the investment have to yield in order for $atrick:s !rother to
deliver on his promise#
LO 2,3
Solution:
0 4 years
$% & $2,400 '% & $4,800

(mount invested in pro<ect & $% & $2,400
9*pected return three years from now & '% &$4,800
3nvestment period & n & 4 years
To calculate the e*pected rate of return, we set up the future value e5uation.
1.92.

+
+
+
"8?2 . 0 " - 000 . 2 .
4800 . "
400 , 2 $
800 , 4 $
- " .
- " . 400 , 2 $ 800 , 4 $
- " . $% '%
4
"
4
4
4
4
i
i
i
i
5.6" 2ou have $"2,000 in cash. 2ou can deposit it today in a mutual fund earning 8.2
percent semiannuallyI or you can wait, en<oy some of it, and invest $"",000 in your
!rother:s !usiness in two years. 2our !rother is promising you a return of at least "0
percent on your investment. hichever alternative you choose, you will need to cash
in at the end of "0 years. (ssume your !rother is trustworthy and that !oth
investments carry the same risk. hich one will you choose#
LO 2,3
Solution:
Jption (7 3nvest in account paying 8.2 percent semiannually for "0 years.
0 "0 years
$% & $"2,000 '% & #

(mount invested in pro<ect & $% & $"2,000
3nvestment period & n & "0 years
3nterest earned on investment & i & 8.2+
%alue of investment after "0 years & '%
"0
$26,03.77

,
_
- 26605 . 2 . 000 , "2 $

2
082 . 0
" $% '%
"0 2
"0
Jption C7 3nvest in !rother:s !usiness to earn "0 percent for eight years.
0 8 years
$% & $"",000 '% & #

(mount invested in pro<ect & $% & $"",000
3nvestment period & n & 8 years
3nterest earned on investment & i & "0+
"0
( )
$23,579.4
+ - "465? . 2 . 000 , "" $ "0 . 0 " $% '%
8
8
2ou are !etter off investing today in the mutual fund and earn 8.2 percent
semiannually for "0 years.
5.32 hen you were !orn, your parents set up a !ank account in your name with an initial
investment of $5,000. 2ou are turning 2" in a few days and will have access to all
your funds. The account was earning /.6 percent for the first seven years, and then the
rates went down to 5.5 percent for si* years. The economy was doing well at the end
of "??0s and your account was earning 8.2 percent for three years in a row.
Hnfortunately, the ne*t two years you only earned 4.0 percent. 'inally, as the
economy recovered, your return <umped to /.0 percent for the last three years.
a. 1ow much money was in your account !efore the rates went down drastically
.end of year "0-#
(. 1ow much money is in your account now, end of year 2"#
#. hat would !e the !alance now if your parents made another deposit of
$",200 at the end of year /#
LO 2,3
Solution:
0 " / "6 "4 "5 "0 2" years
6::::::::::6::::::::::::666:::::::::::::::
$% & $5,000 '% & #
i
"
& /.6+ i
2
& 5.5+ i
6
& 8.2+ i
4
& 4.0+ i
5
& /.0+
a. 3nitial investment & $% & $5,000
3nterest rate for first / years & i
"
& /.6+
3nterest rate for ne*t 0 years & i
2
& 5.5+
6
& 8.2+
3nvestment value at age "0 years & '%
"0
( )
$14,300.55

+
+ + +
- 200/ . " . - 6/88 . " . - 06/0 . " . 000 , 5 $
- 082 . " . - 055 . " . 0/6 . 0 " 000 , 5 $
- " . - " . - " . $% '%
6 0 /
6
6
0
2
/
" "0
i i i
(. 3nterest rate for from age "/ to "8 & i
4
& 4.0+
5
& /.0+
3nvestment at start of "0
th
year & $% & $"4,600.55
3nvestment value at age 2" years & '%
2"
( )
$19,492.3

+
+ +
-- 2458 . " . - 0?4" . " . 55 . 600 , "4 $
- 0/0 . " . 040 . 0 " 55 . 600 , "4 $
- " . - " . '% '%
6 2
6
5
2
4 "0 2"
i i
#. (dditional investment at start of 8th year & $",200
Total investment for ne*t 0 years & $8,"8/.82 K $",200 & $?,68/.82
2
& 5.5+
3nterest rate for years "6 to "0 & i
6
& 8.2+
3nterest rate for from age "/ to "8 & i
4
& 4.0+
5
& /.0+
3nvestment value at age 2" & '%
2"
( )
$22,349.16

+ + + +
- 2458 . " . - 0?4" . " . - 200/ . " . - 6/88 . " . 82 . ?68/ $
- 0/0 . " . 040 . " - 082 . " . - 055 . " . 82 . 68/ , ? $
- " . - " . - " . - " .
6 2 6 0
6
5
2
4
6
6
0
2 / 2"
i i i i FV FV
5.33 Cedric Censon, a top five draft pick of the Chicago Cears, and his agent are
evaluating three contract options. 3n each case, there is a signing !onus and a series of
payments over the life of the contract. 1e uses a "0.25 percent rate of return to
evaluate the contracts. Aiven the cash flows for each of the following options, which
one should he choose#
;ear 9a'+ Flo* /0"e O"tion 5 O"tion < O"tion 9
0 ;igning Conus $6,"00,000 $4,000,000 $4,250,000
" (nnual ;alary $ 050,000 $ 825,000 $ 550,000
2 (nnual ;alary $ /"5,000 $ 850,000 $ 025,000
6 (nnual ;alary $ 822,250 $ ?25,000 $ 800,000
4 (nnual ;alary $ ?/5,000 $",250,000 $ ?00,000
5 (nnual ;alary $","00,000 $",000,000
0 (nnual ;alary $",250,000
LO 4
Solution:
To decide on the !est contract from >r. Censon:s viewpoint, we need to find the
present value of each option. The contract with the highest present value should !e the
one chosen.
O"tion 5:
,iscount rate to !e used & i& "0.25+
$resent value of contract & $%
(
04/ , ?22 , 0 $
04/ , 0?0 $ 605 , 0/5 $ ?"8 , 05? $ 5/0 , 0"6 $ 262 , 588 $ 50? , 58? $ 000 , "00 , 6 $
- "025 . " .
000 , 250 , " $
- "025 . " .
000 , "00 , " $
- "025 . " .
000 , ?/5 $
- "025 . " .
250 , 822 $
- "025 . " .
000 , /"5 $
- "025 . " .
000 , 050 $
000 , "00 , 6 $ $%
0 5 4 6 2 " (
+ + + + + +
+ + + + + +
O"tion <:
C
8?4 , ?86 , 0 $
04? , 840 $ 24? , 0?0 $ 2?/ , 0?? $ 2?? , /48 $ 000 , 000 , 4 $
- "025 . " .
000 , 250 , " $
- "025 . " .
000 , ?25 $
- "025 . " .
000 , 850 $
- "025 . " .
000 , 825 $
000 , 000 , 4 $ $%
4 6 2 " C
+ + + +
+ + + +
O"tion 9:
C
$7,03,096
+ + + + +
+ + + + +
?"6 , 0"6 $ "55 , 00? $ ?/2 , 5?0 $ "8? , 5"4 $ 800 , 4?8 $ 000 , 250 , 4 $
- "025 . " .
000 , 000 , " $
- "025 . " .
000 , ?00 $
- "025 . " .
000 , 800 $
- "025 . " .
000 , 025 $
- "025 . " .
000 , 550 $
000 , 250 , 4 $ $%
5 4 6 2 " C
Jption C is the !est choice for >r. Censon.
5.34 ;urmec, 3nc., had sales of $2." million last year. The company:s primary !usiness line
is manufacturing of nuts and !olts. ;ince this is a mature industry, the analysts are
certain that the sales will grow at a steady rate of / percent a year for as far as they
can tell. The company reports net income that represents 26 percent of sales. The
company:s management would like to !uy a new fleet of trucks !ut can do so only
once the profit reaches $020,000 a year. (t the end of what year will ;urmec !e a!le
to !uy the new fleet of trucks# hat will the sales and profit !e that year#
LO 1,2,3,4
Solution:
Current level of sales for ;urmec & $% & $2,"00,000
$rofit margin & 26+
@et 3ncome for the year & 0.26 * $2,"00,000 & $486,000
Target profit level in the future & '% & $020,000
$ro<ected growth rate of sales & g & /+
e5uation.
0ear' 3.7

+
- "2 . " ln.
- 2860 . " ln.
- 2860 . " ln. - 0/ . " ln.
2860 . "
00 , 486 $
000 , 020 $
- 0/ . " .
- 0/ . " . 000 , 486 $ 000 , 020 $
- g " . $% '%
n
n
n
n
n
n
The company achieves its profit target during the fourth year.
;ales level at end of year 4 & '%
4
.62 $2,752,671
+
4
n
n
- 0/ . " . 000 , "00 , 2 $
- g " . $% '%
$rofit for the year & $2,/52,0/".02 * 0.26 & $633,114.47
5.35 2ou are graduating in two years and you start thinking a!out your future. 2ou know
that you will want to !uy a house five years after you graduate and that you will want
to put down $00,000. (s of right now, you have $8,000 in your savings account. 2ou
are also fairly certain that once you graduate, you can work in the family !usiness and
earn $62,000 a year, with a 5 percent raise every year. 2ou plan to live with your
parents for the first two years after graduation, which will ena!le you to minimiDe
your e*penses and put away $"0,000 each year. The ne*t three years, you will have to
live out on your own, as your younger sister will !e graduating from college and has
already announced her plan to move !ack into the family house. Thus, you will only
!e a!le to save "6 percent of your annual salary. (ssume that you will !e a!le to
invest savings from your salary at /.2 percent. hat is the interest rate at which you
need to invest the current savings account !alance in order to achieve your goal#
=int7 ,raw a time line that shows all the cash flows for years 0 through /.
)emem!er, you want to !uy a house seven years from now and your first salary will
!e in year 6.
LO 1,2,3,4
Solution:
0 " 2 6 4 5 0 /
LMMMMMNMMMMMMNMMMMMNMMMMMNMMMMMMNMMMMMNMMMMMMO
$"0,000 $"0,000
;tarting salary in year 6 & $62,000
(nnual pay increase & 5+
;avings in first 2 years & $"0,000
;avings rate for years 6 to / & "6+
;ear 1 2 3 4 5 6 7
Salar0 $0 $0 $32,000 $33,600 $35,20 $37,044 $3,96
Savin&' $0 $0 $10,000 $10,000 $4,56.40 $4,15.72 $5,056.4
3nvestment rate & i & /.2+
'uture value of savings from salary & '%
/
28 . 0"2 , 4" $
48 . 050 , 5 $ 45 . "02 , 5 $ 80 . 20/ , 5 $ 25 . 6"? , "2 $ 24 . 200 , "6 $
- 0/2 . " . 48 . 050 , 5 $ - 0/2 . " . /2 . 8"5 , 4 $
- 0/2 . " . 40 . 580 , 4 $ - 0/2 . " . 000 , "0 $ - 0/2 . " . 000 , "0 $ 0 $ 0 $ '%
0 "
2 6 4
/
+ + + +
+ +
+ + + +
Target down payment & $00,000
(mount needed to reach target & $00,000 E $4",0"2.28 & '% & $"8,?8/./2
Current savings !alance & $% $8,000
Time to achieve target & n & / years.
To solve for the investment rate needed to achieve target, we need to set up the future
value e5uation7
13.14.

+
+
+
" "6"4 . "
" - 6/65 . 2 .
6/65 . 2
000 , 8 $
/2 . ?8/ , "8 $
- " .
- " . 000 , 8 $ /2 . ?8/ , "8 $
- " . $% '%
/ "
/
/
/
i
i
i
i
Sa$"le /e't ,ro(le$'
5.1 ;antiago 1ernandeD is planning to invest $25,000 in a money market account for two
years. The account pays an interest of 5./5 percent compounded on a monthly !asis.
1ow much will ;antiago 1ernandeD have at the end of two years#
LO 2
Solution:
0 2 years
$% & $25,000 '% & #

2
$2,039.13

,
_
,
_
24
2 "2 mn
2
- "2"0 . " . 000 , 25 $
"2
05/5 . 0
" 000 , 25 $
m
" $% '%
i
5.2 >ichael Carter is e*pecting an inheritance of $".25 million in four years. 3f he had the
money today, he could earn interest at an annual rate of /.65 percent. hat is the
present value of this inheritance#
LO 3
Solution:
0 4 years
$% & # '% & $",250,000

(mount needed for down payment after 4 years & '%
4
& $",250,000
( )
3 $941,243.1
4 n
n
- 0/65 . " .
000 , 250 , " $
"
'%
$%
i
5.3 hat is the future value of an investment of $6,000 for three years compounded at the
following rates and fre5uencies#
a. 8./5+ compounded monthly.
(. 8.025+ compounded daily.
#. 8.5+ compounded continuously.
LO 2
Solution:
a. 3nterest rate on investment & i & 8./5+
6
$3,96.2
,
_
+
,
_
60
6 "2
6
- 00/2? . " . 000 , 6 $
"2
08/5 . 0
" 000 , 6 $ "
mn
m
i
PV FV
(. 're5uency of compounding & m & 605
6
$3,5.1
,
_
,
_
"0?5
6 605 mn
6
- 000260 . " . 000 , 6 $
605
08025 . 0
" 000 , 6 $
m
" $% '%
i
#. 're5uency of compounding & m & Continuous
6
$3,71.3

2?040 . " 000 , 6 $
e 000 , 6 $ e $% '%
6 085 . 0
6
in
5.4. TwentyEfive years ago, (manda CorteD invested $"0,000 in an account paying an
annual interest rate of 5./5 percent. hat is the value of the investment today# hat
is the interestEonEinterest earned on this investment#
LO 2,3
Solution:
0 25 years
$% & $"0,000 '% & #

(mount invested today & $% & $"0,000
25
40 . 458 , 40 $
- 05/5 . " . 000 , "0 $ - " . $% '%
25 25
25
+ i
;imple interest on investment & $"0,000 * 0.05/5 * 25
& $","50
3nterestEonEinterest & $40,458.40 P $","50 & $39,30.46
5.5 2ou <ust !ought a corporate !ond at $806./5 today. 3n five years the !ond will mature
and you will receive $",000. hat is the rate of return on this !ond#
LO 2,4
Solution:
0 5 years
$% & $806./5 '% & $",000

(mount to !e !orrowed & $% & $806./5
(mount to !e paid !ack after 5 years & '%
5
& $",000
2ears to maturity & n & 5 years.
3nterest rate on investment & i
( )
2.97. i

+
+
" - "5// . " .

"5// . "
$806./5
$",000
- " .
- " .
000 , " $
/5 . 806 $
"
'%
$%
5 "
5
5
n
n
i
i
i
i
The rate of return on this !ond is 2.?/ percent
C1($T9) ;3F
6.1 Future value *it+ $ulti"le #a'+ >lo*': 8onerko, 3nc., e*pects to earn cash flows of
$"6,22/, $"5,0"", $"8,?/0, and $"?,""4 over the ne*t four years. 3f the company uses
an 8 percent discount rate, what is the future value of these cash flows at the end of
year 4#
Solution:
0 8+ " 2 6 4
LMMMMMMMNMMMMMMMMNMMMMMMMNMMMMMMMMO
$"6,22/ $"5,0"" $"8,?/0 $"?,""4
6.2 Future value *it+ $ulti"le #a'+ >lo*': Cen oolmer has an investment that will
pay him the following cash flows over the ne*t five years7 $2,650, $2,/25, $6,"28,
$6,600, and $6,0?5. 3f his investments typically earn /.05 percent, what is the future
value of the investment:s cash flows at the end of five years#
Solution:
0 /.05+ " 2 6 4 5
LMMMMMMMNMMMMMMMMNMMMMMMMNMMMMMMMMNMMMMMMMO
$2,650 $2,/25 $6,"28 $6,600 $6,0?5
$17,49.75
+ + + +
+ + + +
0?5 , 6 $ 50 . 026 , 6 $ 8? . 024 , 6 $ 45 . 6?? , 6 $ ?" . "55 , 6 $
0?5 , 6 $ - 0/05 . " . 600 , 6 $ - 0/05 . " . "28 , 6 $ - 0/05 . " . /25 , 2 $ - 0/05 . " . 650 , 2 $ '%
" 2 6 4
5
$74,472.4
+ + +
+ + +
""4 , "? $ 00 . 48/ , 20 $ 0/ . 208 , "8 $ 2" . 002 , "0 $
""4 , "? $ - 08 . " . ?/0 , "8 $ - 08 . " . 0"" , "5 $ - 08 . " . 22/ , "6 $ '%
" 2 6
4
6.3 Future value *it+ $ulti"le #a'+ >lo*': 2ou are a freshman in college and are
planning a trip to 9urope when you graduate from college at the end of four years.
2ou plan to save the following amounts starting today7 $025, $/00, $/00, and $/50.
3f the account pays 5./5 percent annually, how much will you have at the end of four
years#
Solution:
0 5./5+ " 2 6 4
LMMMMMMMNMMMMMMMMNMMMMMMMNMMMMMMMMO
$025 $/00 $/00 $/50
$3,15.40
+ + +
+ + +
"6 . /?6 8" . /82 $ 86 . 82/ $ 06 . /8" $
- 05/5 . " . /50 $ - 05/5 . " . /00 $ - 05/5 . " . /00 $ - 05/5 . " . 025 $ '%
2 6 4
4
6.4 ,re'ent value *it+ $ulti"le #a'+ >lo*': ;aul Cervantes has <ust purchased some
e5uipment for his landscaping !usiness. 1e plans to pay the following amounts at the
end of the ne*t five years7 $"0,450, $8,500, $?,0/5, $"2,500, and $"",065. 3f he uses
a discount rate of "0.8/5 percent, what is the cost of the e5uipment he purchased
today#
Solution:
0 "0.8/5+ " 2 6 4 5
$"0,450 $8,500 $?,0/5 $"2,500 $"",065
$3,652.76
+ + + +
+ + + +
82 . ?46 , 0 $ 66 . 2/" , 8 26 . 0?8 , / $ 65 . ?"4 , 0 $ 06 . 425 , ? $
- "08/5 . " .
065 , "" $
- "08/5 . " .
500 , "2 $
- "08/5 . " .
0/5 , ? $
- "08/5 . " .
500 , 8 $
- "08/5 . " .
450 , "0 $
$%
5 4 6 2
6.5 ,re'ent value *it+ $ulti"le #a'+ >lo*': Qeremy 'enloch !orrowed from his friend a
certain amount and promised to repay him the amounts of $",225, $",650, $",500,
$",000, and $",000 over the ne*t five years. 3f the friend normally discounts
investments at 8 percent annually, how much did Qeremy !orrow#
Solution:
0 8+ " 2 6 4 5
$",225 $",650 $",500 $",000 $",000
$5,747.40
+ + + +
+ + + +
?6 . 088 , " $ 05 . "/0 , " $ /5 . "?0 , " $ 4" . "5/ , " $ 20 . "64 , " $
- 08 . " .
000 , " $
- 08 . " .
000 , " $
- 08 . " .
500 , " $
- 08 . " .
650 , " $
- 08 . " .
225 , " $
$%
5 4 6 2
6.6 ,re'ent value *it+ $ulti"le #a'+ >lo*': Ciogenesis, 3nc., e*pects the following cash
flow stream over the ne*t five years. The company discounts all cash flows at a 26
percent discount rate. hat is the present value of this cash flow stream#
Solution:
0 26+
" 2 6 4 5
1 2 3 4 5
E$","66,0/0 E$?/8,452 $2/5,455 $8/8,620 $",865,444
E$","66,0/0 E$?/8,452 $2/5,455 $8/8,620 $",865,444
2 $34,711.7
+ + +
+ + +
?4 . ?5" , 05" $ . 46 . /68 , 686 $ 0? . 025 , "48 $ 6/ . /6? , 040 $ 80 . 08/ , ?2" $
- 26 . " .
444 , 865 , " $
- 26 . " .
620 , 8/8 $
- 26 . " .
455 , 2/5 $
- 26 . " .
452 , ?/8 $
- 26 . " .
0/0 , "66 , " $
$%
5 4 6 2
6.7 ,re'ent value o> an or%inar0 annuit0: (n investment opportunity re5uires a
payment of $/50 for "2 years, starting a year from today. 3f your re5uired rate of
return is 8 percent, what is the value of the investment today#
Solution:
0 8+ " 2 6 "" "2
LMMMMMMMNMMMMMMMMNMMMMMMMNRRRRRRNMMMMMMMO
$/50 $/50 $/50 $/50 $/50
(nnual payment & $>T & $/50
@o. of payments & n & "2
)e5uired rate of return & 8+
$resent value of investment & $%(
"2
$5,652.06

1
1
1
1
]
1

560" . / /50 $
08 . 0
- 08 . " .
"
"
/50 $
- " .
"
"
$>T $%(
"2
n
n
i
i
6. ,re'ent value o> an or%inar0 annuit0: ,ynamics Telecommunications Corp. has
made an investment in another company that will guarantee it a cash flow of $22,500
each year for the ne*t five years. 3f the company uses a discount rate of "5 percent on
its investments, what is the present value of this investment#
Solution:
0 "5+ " 2 6 4 5
$22,500 $22,500 $22,500 $22,500 $22,500
(nnual payment & $>T & $22,500
@o. of payments & n & 5
)e5uired rate of return & "5+
$resent value of investment & $%(
5
$75,423.49

1
1
1
1
]
1

6522 . 6 500 , 22 $
"5 . 0
- "5 . " .
"
"
500 , 22 $
- " .
"
"
$>T $%(
5
n
n
i
i
6.9 Future value o> an or%inar0 annuit0: )o!ert 1o!!es plans to invest $25,000 a year
for the ne*t seven years in an investment that will pay him a rate of return of "".4
percent. 1e will invest at the end of each year. hat is the amount that >r. 1o!!es
will have at the end of seven years#
Solution:
0 "".4+ " 2 6 0 /
$25,000 $25,000 $25,000 $25,000 $25,000
(nnual investment & $>T & $25,000
@o. of payments & n & /
3nvestment rate of return & "".4+
'uture value of investment & '%(
/
5 $247,609.9

1
]
1
+

?044 . ? 000 , 25 $
""4 . 0
" - ""4 . " .
000 , 25 $
" - " .
$>T '%(
/
n
n
i
i
6.10 Future value o> an or%inar0 annuit0: Cecelia Thomas is a sales e*ecutive at a
Caltimore firm. ;he is 25 years old and plans to invest $6,000 every year in an 3)(
account, !eginning at the end of this year until she turns 05 years old. 3f the 3)(
investment will earn ?./5 percent annually, how much will she have in 40 years when
she turns 05 years old#
Solution:
0 ?./5+ " 2 6 6? 40
$6,000 $6,000 $6,000 $6,000 $6,000
3nvestment rate of return & ?./5+
40
.41 $1,240,676

1
]
1
+

5588 . 4"6 000 , 6 $
0?/5 . 0
" - 0?/5 . " .
000 , 6 $
" - " .
$>T '%(
40
n
n
i
i
6.11 Future value o> an annuit0. )efer to $ro!lem 0."0. 3f Cecelia Thomas starts saving
at the !eginning of each year, how much will she have at age 05#
Solution:
0 ?./5+ " 2 6 6? 40
$6,000 $6,000 $6,000 $6,000 $6,000
Type of annuity & (nnuity due
3nvestment rate of return & ?./5+
40
.36 $1,361,642

1
]
1

+
1
]
1
+

0?/5 . " 5588 . 4"6 000 , 6 $ - 0?/5 . " .
0?/5 . 0
" - 0?/5 . " .
000 , 6 $
- " .
" - " .
$>T '%(
40
n
n
i
i
i
6.12 9o$"utin& annuit0 "a0$ent: 8evin inthrop is saving for an (ustralian vacation
in three years. 1e estimates that he will need $5,000 to cover his airfare and all other
e*penses for a weekElong holiday in (ustralia. 3f he can invest his money in an ;S$
500 e5uity inde* fund that is e*pected to earn an average return of "0.6 percent over
the ne*t three years, how much will he have to save every year, starting at the end of
this year#
Solution:
0 "0.6+ " 2 6
LMMMMMMMNMMMMMMMMNMMMMMMMO
$>T $>T $>T
F85
n
? $5,000
'uture value of annuity & '%( & $5,000
)eturn on investment & i & "0.6+
$ayment re5uired to meet target & $>T
Hsing the '%( e5uation7
$1,506.20

1
]
1
+

6"?0 . 6
000 , 5 $
"06 . 0
" - "06 . " .
000 , 5 $
$>T
"06 . 0
" - "06 . " .
$>T 000 , 5 $
" - " .
$>T '%(
6
6
n
n
i
i
8evin has to save $",500.20 every year for the ne*t three years to reach his target of
$5,000.
6.13 9o$"utin& annuit0 "a0$ent: The 9lkridge Car S Arill has a sevenEyear loan of
$26,500 with Cank of (merica. 3t plans to repay the loan !y paying in seven e5ual
installments starting today. 3f the rate of interest is 8.4 percent, how much will each
payment !e worth#
0 " 2 6 0 /
$>T $>T $>T $>T $>T $>T
,85
n
? $23,500 n & /I i & 8.4+
$resent value of annuity & $%( & $26,500
)eturn on investment & i & 8.4+
$ayment re5uired to meet target & $>T
Type of annuity & (nnuity due
Hsing the $%( e5uation7
$4,221.07
1
1
1
1
]
1
+
1
1
1
1
]
1

084 . " "65? . 5
500 , 26 $
- 084 . " .
084 . 0
- 084 . " .
"
"
500 , 26 $
$>T
- " .
- " .
"
"
$>T $%(
/
n
n
i
i
i
9ach payment made !y 9lkridge Car S Arill will !e $4,22".0/, starting today.
6.14 ,er"etuit0: 2our grandfather is retiring at the end of ne*t year. 1eould like to
receive a payment of $"0,000 a year forever, starting when he retires. 3f he can invest
at 0.5 percent, how much does need to invest to receive the desired cash flow#
Solution:
(nnual payment needed & $>T & $"0,000
3nvestment rate of return & i & 0.5+
Term of payment & $erpetuity
$resent value of investment needed & $%
5 $153,46.1

005 . 0
000 , "0 $ $>T
y $erpetuit of $%
i
6.15 ,er"etuit0: Calculate the perpetuity payments for each of the following cases7
a. $250,000 invested at 0+
(. $50,000 invested at "2+
#. $"00,000 invested at "0+
Solution:
a. (nnual payment & $>T
3nvestment rate of return & i & 0+
$resent value of investment needed & $% & $250,000
$15,000

0.00 $250,000 $% $>T

$>T
y $erpetuit of $%
i
i
(. (nnual payment & $>T
3nvestment rate of return & i & "2+
$resent value of investment needed & $% & $50,000
$6,000

0."2 $50,000 $% $>T

$>T
y $erpetuit of $%
i
i
#. (nnual payment & $>T
3nvestment rate of return & i & "0+
$resent value of investment needed & $% & $"00,000
$10,000

0."0 $"00,000 $% $>T

$>T
y $erpetuit of $%
i
i

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5.

1 Future value: Chuck Tomkovick is planning to invest $25,000 today in a mutual

$% & $25,000 '% & #

$% & $/,500 '% & #

$% & $5,000 '% & #

$% & $2,000 '% & #

$% & $2,/00 '% & #

$% & $",000 '% & #

$% & $"00,000 '% & #

$% & 25 '% & #

$% & # '% & $25,000

$% & # '% & $/50

$% & # '% & $/,/50

$% & # '% & $65,000

$% & # '% & $",000

$% & # '% & $"2,000

$% & $",600 '% & $",500

$% & $"50 '% & $600

- 64?8 . " . 500 , 2 $

$% & $",?00 '% & #

$% & # '% & $6,500

$% & # '% & $5,500

$% & $2,500 '% & $6,/00

$% & $2,400 '% & $4,800

$% & $"2,000 '% & #

- 26605 . 2 . 000 , "2 $

$% & $"",000 '% & #

$% & $25,000 '% & #

$% & # '% & $",250,000

$% & $"0,000 '% & #

$% & $806./5 '% & $",000

" - "5// . " .

0.00 $250,000 $% $>T

0."2 $50,000 $% $>T

0."0 $"00,000 $% $>T

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