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Chapter 3 The Time Value of Money

Yiheng Li ID: 511541

Chapter 3:

4) You need to have $50,000 at the end of 10 years. To accumulate this sum, you have

decided to save a certain amount at the end of each of the next 10 years and deposit it in

the bank. The bank pays 8 percent interest compounded annually for long-term deposits.

How much will you have to save each year (to the nearest dollar)?

10 = $50,000,

= 0.08

= 10

10 = (,) = [=1(1 + )] = [(1 + ) 1]/,

R = $3451.5.

5) Same as Problem 4 above, except that you deposit a certain amount at the beginning of

each of the next 10 years. Now, how much will you have to save each year (to the nearest

dollar)?

10 = $50,000,

= 0.08,

= 10

10 = (,) = [=1(1 + )+1] = 1+ [(1 + )

R = $3195.8.

9) The H & L Bark Company is considering the purchase of a debarking machine that is

expected to provide cash flows as follows:

If the appropriate annual discount rate is 14 percent, what is the present value of this

cash-flow stream?

2.prsent value of $2000due in year 2=(2000)(.769)=1538.0

3.prsent value of $2400due in year 3=(2400)(.675)=1620.0

4.prsent value of $1900due in year 4=(1900)(.592)=1124.0

5.prsent value of $1600due in year 5=(1600)(.519)=830.4

Subtotal =$6,165.60

1. Present value at the beginning of year 6 = 1400(3.433)=4806.2

2. Present value at the beginning of year 1 = 4806.2(.519)=2494.41

So, present value of total

series=(1052.4+1538+1620+1124.8+830.4)+2494.41=8,661.80

14) Establish loan amortization schedules for the following loans to the nearest cent (see

Table 3.8 for an example):

a) A 36-month loan of $8,000 with equal installment payments at the end of each month.

The interest rate is 1 percent per month.

36 = 0(1%,36) = $8000(1 + 0.01)36 = $11446.15, 36 =

(1%,36) = (1.0136 1)/0.01,

36 = 36, R = $265.71

End of year Installments Interest Monthly Interest Principal Payment Principal Amount

0 8000

1 265.71 0.01 80 185.71 7814.29

2 265.71 0.01 78.1429 187.5671 7626.7229

3 265.71 0.01 76.267229 189.442771 7437.280129

4 265.71 0.01 74.37280129 191.3371987 7245.94293

5 265.71 0.01 72.4594293 193.2505707 7052.69236

6 265.71 0.01 70.5269236 195.1830764 6857.509283

7 265.71 0.01 68.57509283 197.1349072 6660.374376

8 265.71 0.01 66.60374376 199.1062562 6461.26812

9 265.71 0.01 64.6126812 201.0973188 6260.170801

10 265.71 0.01 62.60170801 203.108292 6057.062509

11 265.71 0.01 60.57062509 205.1393749 5851.923134

12 265.71 0.01 58.51923134 207.1907687 5644.732365

13 265.71 0.01 56.44732365 209.2626763 5435.469689

14 265.71 0.01 54.35469689 211.3553031 5224.114386

15 265.71 0.01 52.24114386 213.4688561 5010.64553

16 265.71 0.01 50.1064553 215.6035447 4795.041985

17 265.71 0.01 47.95041985 217.7595801 4577.282405

18 265.71 0.01 45.77282405 219.937176 4357.345229

19 265.71 0.01 43.57345229 222.1365477 4135.208681

20 265.71 0.01 41.35208681 224.3579132 3910.850768

21 265.71 0.01 39.10850768 226.6014923 3684.249276

22 265.71 0.01 36.84249276 228.8675072 3455.381769

23 265.71 0.01 34.55381769 231.1561823 3224.225586

24 265.71 0.01 32.24225586 233.4677441 2990.757842

25 265.71 0.01 29.90757842 235.8024216 2754.955421

26 265.71 0.01 27.54955421 238.1604458 2516.794975

27 265.71 0.01 25.16794975 240.5420503 2276.252924

28 265.71 0.01 22.76252924 242.9474708 2033.305454

29 265.71 0.01 20.33305454 245.3769455 1787.928508

30 265.71 0.01 17.87928508 247.8307149 1540.097793

31 265.71 0.01 15.40097793 250.3090221 1289.788771

32 265.71 0.01 12.89788771 252.8121123 1036.976659

33 265.71 0.01 10.36976659 255.3402334 781.6364256

34 265.71 0.01 7.816364256 257.8936357 523.7427898

35 265.71 0.01 5.237427898 260.4725721 263.2702177

36 265.71 0.01 2.632702177 263.0772978 0.192919921

with equal installment payments at the end of each year.

25 = 0(10%,25) = $8000(1 + 0.01)36 = $11446.15,

36 = (1%,36) = (1.0136 1)/0.01,

36 = 36, R = $265.71.

End of

year Payment Interest rate interest Payment Principal payment Principal

0 184000

1 20271.01 0.1 18400 1871.01 182128.99

2 20271.01 0.1 18212.899 2058.111 180070.879

3 20271.01 0.1 18007.0879 2263.9221 177806.95

4 20271.01 0.1 17780.69569 2490.31431 175316.64

5 20271.01 0.1 17531.66426 2739.345741 172577.29

6 20271.01 0.1 17257.72968 3013.280315 169564.05

7 20271.01 0.1 16956.40165 3314.608347 166249.40

8 20271.01 0.1 16624.94082 3646.069181 162603.339

9 20271.01 0.1 16260.3339 4010.676099 158592.669

10 20271.01 0.1 15859.26629 4411.743709 154180.919

11 20271.01 0.1 15418.09192 4852.91808 149328.001

12 20271.01 0.1 14932.80011 5338.209888 143989.791

13 20271.01 0.1 14398.97912 5872.030877 138117.760

14 20271.01 0.1 13811.77604 6459.233965 131658.526

15 20271.01 0.1 13165.85264 7105.157361 124553.369

16 20271.01 0.1 12455.3369 7815.673097 116737.695

17 20271.01 0.1 11673.76959 8597.240407 108140.455

18 20271.01 0.1 10814.04555 9456.964448 98683.4910

19 20271.01 0.1 9868.349107 10402.66089 88280.8301

20 20271.01 0.1 8828.083018 11442.92698 76837.9032

21 20271.01 0.1 7683.79032 12587.21968 64250.6835

22 20271.01 0.1 6425.068352 13845.94165 50404.7418

23 20271.01 0.1 5040.474187 15230.53581 35174.2060

24 20271.01 0.1 3517.420606 16753.58939 18420.6166

25 20271.01 0.1 1842.061666 18428.94833 -8.33167139

15) You have borrowed $14,300 at a compound annual interest rate of 15 percent. You feel that you will

be able to make annual payments of $3,000 per year on your loan. (Payments include both principal and

interest.) How long will it be before the loan is entirely paid off (to the nearest year)?

=0(,)=$14,300(1+0.15),

= (,) = $3,000(1.15 1)/0.15,

= , = 9.

17) Earl E. Bird has decided to start saving for his retirement. Beginning on his twenty-first birthday,

Earl plans to invest $2,000 each birthday into a savings investment earning a 7 percent compound annual

rate of interest. He will continue this savings program for a

total of 10 years and then stop making payments. But his savings will continue to compound at 7 percent

for 35 more years, until Earl retires at age 65. Ivana Waite also plans to invest $2,000 a year, on each

birthday, at 7 percent, and will do so for a total of 35 years. However, she will not begin her

contributions until her thirty-first birthday. How much will Earls and Ivanas savings programs be

worth at the retirement age of 65? Who is better off financially at retirement, and by how much?

$149,975.68,

This is the saving worth of Earl

(2) FVR = R 25 (1 + 0.07)25+1 = 2000 0.07 (1.0725 1) = $135,352.94,

This the saving worth of Ivana

So Earl is better off financially,

by FVR1 FVR2 = $14,622.7

20) Suppose that an investment promises to pay a nominal 9.6 percent annual rate of interest.

What is the effective annual interest rate on this investment assuming that interest is

compounded (a) annually? (b) semiannually? (c) quarterly? (d) monthly? (e) daily (365

days)? (f ) continuously? (Note: Report your answers accurate to four decimal places

e.g., 0.0987 or 9.87%.)

Nominal

Interest 9.6% 0.03% 0

4.8% 2.4% 0.8%

Rate

Annual = 10.07%

Interest

Rate

22) It took roughly 14 years for the Dow Jones Average of 30 Industrial Stocks to go from

1,000 to 2,000. To double from 2,000 to 4,000 took only 8 years, and to go from 4,000 to

8,000 required roughly 2 years. To the nearest whole percent, what compound annual

growth rates are implicit in these three index-doubling milestones?

Assume the rate from 1000 to 2000 as 1, 2000 to 4000 as 2, 4000 to 8000

as 3, then

2000 (1+1)14 =4000

4000 (1+1)8 =8000,

2000 (1 + 1)2 = 4000

So,

1 = 5.07% 2 = 9.05% 3 = 41.42%

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