AGEC 424 Chapter 6 Homework (key): TVM-2

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1. The Lexington Property Development Company has a $10,000 note receivable from a
customer ue in three years. !o" much is the note "orth toay if the interest rate is
a. #$%
b. 1&$ compoune monthly%
c. '$ compoune (uarterly%
. 1'$ compoune monthly%
e. )$ compoune continuously%
Cal(lator +olt$on:
* + ,- P.T P-/%
a 0 # 10,00
0
0 $),)&&
b 01 1 10,00
0
0 $1,#'#
c 1& & 10,00
0
0 $),''2
01 1.2 10,00
0
0 $2,'21
e. not assigne. Continuous compouning uses e 3the base of the natural logarithm4.
,- / P- 3e
5n
4
$10,000 / P- 6e
.0)304
7
$10,000 / P- 61.&00)7
P- / $',102.)0
&. 8hat "ill a eposit of $9,200 left in the ban5 be "orth uner the follo"ing conitions:
a. Left for nine years at )$ interest%
b. Left for six years at 10$ compoune semiannually%
c. Left for five years at '$ compoune (uarterly%
. Left for 10 years at 1&$ compoune monthly%
Cal(lator +olt$on!:
* + P- P.T ,-/%
a # ) 9,200 0 $',&)0.&2
b 1& 2 9,200 0 $',0'1.22
c &0 & 9,200 0 $1,1'1.22
1&0 1 9,200 0 $19,'21.'0
0. 8hat interest rates are implie by the follo"ing lening arrangements%
a. ;ou borro" $200 an repay $222 in one year.
b. ;ou len $1,'20 an are repai $&,0)'.11 in t"o years.
c. ;ou len $)20 an are repai $1,119.91 in five years "ith (uarterly compouning.
. ;ou borro" $1&,200 an repay $&1,019.&9 in three years uner monthly
compouning.
3*ote: +n c an , be sure to give your ans"er as the annual nominal rate.4
Cal(lator +olt$on:
* P- P.T ,- +/% *om/%
1 200 0 <222 11$ =
1
& 1,'20 0 <&,0)'.11 1$ =
&0 )20 0 <1,119.91 &$ '$
01 1&,200 0 <&1,019.&9 1.2$ 1'$
9. !o" long oes it ta5e for the follo"ing to happen%
a. $'21 gro"s into $1,1&& at )$.
b. $920 gro"s into $)&2.20 at 1&$ compoune monthly.
c. $2,000 gro"s into $1)&9.99 at 10$ compoune (uarterly.
Cal(lator +olt$on:
+ P- P.T ,- */%
) <'21 0 1,1&& 9 years
1 <920 0 )&2.20 9' months / 9 years
&.2 <2,000 0 1,)&9.99 1& (uarters / 0 years
2. >ally ?uthrie is loo5ing for an investment vehicle that "ill ouble her money in five years.
a. 8hat interest rate, to the nearest "hole percentage, oes she have to receive%
b. @t that rate, ho" long "ill it ta5e the money to triple%
c. +f she canAt fin anything that pays more than 11$, approximately ho" long "ill it
ta5e to ouble her investment%
. 8hat 5in of financial instruments o you thin5 >ally is loo5ing at% @re they ris5y%
8hat coul happen to >allyAs investment%
+,-.T/,0!:
a.
* +/% P- P.T ,-
2 12$ <1 0 &
b. n / ).# years 3approximate "ith ' years4
*/% + P- P.T ,-
).# 12 <1 0 0
c. n / 1.1 years 3approximate "ith ) years4
*/% + P- P.T ,-
1.1 11 <1 0 &
. +nvestments "ith anticipate returns li5e these are probably gro"th<oriente stoc5s "ith
consierable ris5. >he coul lose money.
&0. 8hat are the monthly mortgage payments on a 00<year loan for $120,000 at 1&$% Construct
an amortiBation table for the first six months of the loan.
+,-.T/,0:
* + P- P.T/% ,-
010 1&C1& 120,00
0
<129&.#& 0
;ear Deg Dal P.T +*T Prin Ee. Fn Dal
1 $120,000.00 $1,29&.#& $1,200.00 $9&.#& $19#,#2).0'
& 19#,#2).0' 1,29&.#& 1,9##.2) 90.02 19#,#10.)0
0 19#,#10.)0 1,29&.#& 1,9##.10 90.)# 19#,'1#.#9
9 19#,'1#.#9 1,29&.#& 1,9#'.)0 99.&& 19#,'&2.)&
2 19#,'&2.)& 1,29&.#& 1,9#'.&1 99.11 19#,)'1.01
1 19#,)'1.01 1,29&.#& 1,9#).'1 92.11 19#,)02.#2
&
&'. The Grion Corp. is evaluating a proposal for a ne" proHect. +t "ill cost $20,000 to get
the unerta5ing starte. The proHect "ill then generate cash inflo"s of $&0,000 in its first
year an $11,000 per year in the next five years after "hich it "ill en. Grion uses an
interest rate of 12$ compoune annually for such evaluations.
a. Calculate the I*et Present -alueJ 3*P-4 of the proHect by treating the initial
cost as a cash outflo" 3a negative4 in the present, an aing the present value of the
subse(uent cash inflo"s as positives.
b. 8hat is the implication of a positive *P-% 38ors only.4
c. >uppose the inflo"s "ere some"hat lo"er, an the *P- turne out to be negative.
8hat "oul be the implication of that result% 38ors only.4
3This problem is a previe" of a techni(ue calle Capital Dugeting, "hich "eKll stuy in
etail in Chapters #, 10, an 11.4
+olt$on:
a. Lse the C,H portion of your calculator
C,
0
/ <20,000
C,
1
/ &0,000
C,
&
/ 11,000 M C,
1
/ 11,000
+ / 12
Compute *P- / 19,0&#.#'
b. @ positive *P- means that on a present value basis the proHectKs cash inflo"s
excee its outflo"s. That implies itKs a goo eal for the company. +n essence it is
expecte to increase the firmKs "ealth an value to stoc5holers. >ince thatKs "hat
management is suppose to o, they shoul accept the proHect.
c. @ negative means Hust the opposite. +t implies that, on balance, the proHect "ill
cost the firm money. !ence it shoul be reHecte.
0&. Nanet Flliott Hust turne &0, an receive a gift of $&0,000 from her rich uncle.
Nanet plans ahea an "oul li5e to retire on her 22
th
birthay. >he thin5s sheKll nee to
have about $& million save by that time in orer to maintain her lavish lifestyle. >he
"ants to ma5e a payment at the en of each year until sheKs 20 into an account sheKll
open "ith her uncleKs gift. @fter that sheK li5e to stop ma5ing payments an let the
money gro" at interest until it reaches $& million "hen she turns 22. @ssume she can
invest at )$ compoune annually. +gnore the effect of taxes.
a. !o" much "ill she have to invest each year in orer to achieve her obHective%
b. 8hat percent of the $& million "ill have been contribute by Nanet 3incluing the
$&0,000 she got from her uncle4%
+,-.T/,0:
a. ,irst "e nee to 5no" ho" much she "ill nee to accumulate by the time she reaches
20 so that amount can gro" to $& million by the time she reaches 22.
n / 2O +C; / )O P.T / 0O ,- / &,000,000 CPT P- / $1,9&2,#)&.01
That number becomes the ,- in an orinary annuity "ith a $&0,000 P-
n / 00O +C; / )O P- / &0,000O ,- / 31,9&2,#)&.014 CPT P.T / $10,9'9.1#
b. Nanet "ill have contribute
$&0,000 P 00 x $10,9'9.1# / $9&9,2&2.)0, an
9&9,2&2.)0C&,000,000 / &1.&0$
0