1

Additionalî€ƒpracticeî€ƒexercisesî€ƒtopicsî€ƒ2î€ƒ(timeî€ƒvalueî€ƒofî€ƒmoney)î€ƒandî€ƒ3î€ƒ(bondî€ƒ

valuation)î€ƒ

Solutionsî€ƒareî€ƒprovidedî€ƒatî€ƒtheî€ƒend.î€ƒî€ƒ

î€ƒ

Questionî€ƒ1:î€ƒ(TVM)î€ƒ

Youî€ƒcanî€ƒbuyî€ƒpropertyî€ƒtodayî€ƒforî€ƒ$3î€ƒmillionî€ƒandî€ƒsellî€ƒitî€ƒinî€ƒ5î€ƒyearsî€ƒforî€ƒ$4î€ƒmillion.î€ƒYouî€ƒwillî€ƒearnî€ƒnoî€ƒrentalî€ƒ

incomeî€ƒonî€ƒtheî€ƒproperty.î€ƒ

a. Ifî€ƒtheî€ƒinterestî€ƒrateî€ƒisî€ƒ8%,î€ƒshouldî€ƒyouî€ƒbuyî€ƒtheî€ƒproperty?î€ƒ

b. Supposeî€ƒtheî€ƒpropertyî€ƒearnsî€ƒ$200,000î€ƒrent,î€ƒatî€ƒtheî€ƒbeginningî€ƒofî€ƒeachî€ƒyear.î€ƒShouldî€ƒyouî€ƒbuyî€ƒit?î€ƒ

c. Supposeî€ƒyouî€ƒthinkî€ƒthatî€ƒthereî€ƒisî€ƒonlyî€ƒaî€ƒ75%î€ƒchanceî€ƒtheî€ƒpropertyî€ƒwillî€ƒsellî€ƒforî€ƒ$4,000,000î€ƒandî€ƒaî€ƒ25%î€ƒ

chanceî€ƒthatî€ƒitî€ƒwillî€ƒsellî€ƒforî€ƒ$3,000,000î€ƒinî€ƒ5î€ƒyears.î€ƒShouldî€ƒyouî€ƒbuyî€ƒtheî€ƒproperty?î€ƒ

î€ƒ

Questionî€ƒ2:î€ƒ(TVM)î€ƒ

Jenniferî€ƒJackPotî€ƒhasî€ƒjustî€ƒwonî€ƒlottery.î€ƒSheî€ƒwillî€ƒgetî€ƒ$50,000î€ƒeveryî€ƒ6î€ƒmonthsî€ƒforî€ƒ10î€ƒyearsî€ƒ(20î€ƒpayments).î€ƒ

Theî€ƒfirstî€ƒpaymentî€ƒwillî€ƒbeî€ƒcomingî€ƒ4.5î€ƒyearsî€ƒfromî€ƒtoday;î€ƒsubsequentî€ƒpaymentsî€ƒwillî€ƒbeî€ƒeveryî€ƒ6î€ƒmonthsî€ƒ

thereafter.î€ƒIfî€ƒtheî€ƒdiscountî€ƒrateî€ƒisî€ƒ13.61%î€ƒcompoundedî€ƒmonthly,î€ƒ

a. Whatî€ƒisî€ƒtheî€ƒvalueî€ƒofî€ƒthisî€ƒannuityî€ƒthreeî€ƒyearsî€ƒfromî€ƒnow?î€ƒî€ƒî€ƒ

b. Whatî€ƒisî€ƒtodayâ€™sî€ƒvalueî€ƒofî€ƒtheî€ƒannuity?î€ƒ

î€ƒ

Questionî€ƒ3:î€ƒ(TVM)î€ƒ

Timî€ƒCronyî€ƒisî€ƒtheî€ƒKnightî€ƒerrantî€ƒofî€ƒtheî€ƒPeachlandî€ƒinî€ƒtheî€ƒCourtî€ƒofî€ƒLuxemstein.î€ƒHeî€ƒisî€ƒ60î€ƒyearsî€ƒold,î€ƒwithî€ƒanî€ƒ

averageî€ƒlifeî€ƒexpectancyî€ƒofî€ƒ87,î€ƒandî€ƒisî€ƒpaidî€ƒ$60,000î€ƒannually.î€ƒKingî€ƒVincentî€ƒNepotismî€ƒwantsî€ƒhimî€ƒtoî€ƒresignî€ƒ

soî€ƒthatî€ƒaî€ƒdistantî€ƒcousinî€ƒofî€ƒKingî€ƒVincentî€ƒcanî€ƒhaveî€ƒtheî€ƒjob.î€ƒTimî€ƒrefuses,î€ƒsinceî€ƒtheî€ƒappointmentî€ƒisî€ƒforî€ƒlife.î€ƒ

Heî€ƒsuggestsî€ƒinsteadî€ƒthatî€ƒheî€ƒretiresî€ƒinî€ƒ5î€ƒyearsî€ƒwithî€ƒaî€ƒpensionî€ƒofî€ƒ$50,000î€ƒperî€ƒannum,î€ƒwithî€ƒhisî€ƒwifeî€ƒ(whoî€ƒisî€ƒ

expectedî€ƒtoî€ƒoutliveî€ƒhimî€ƒbyî€ƒ20î€ƒyears)î€ƒgettingî€ƒhalfî€ƒonî€ƒhisî€ƒdeath.î€ƒInî€ƒadditionî€ƒheî€ƒwantsî€ƒtoî€ƒstayî€ƒonî€ƒstaffî€ƒforî€ƒ5î€ƒ

yearsî€ƒafterî€ƒhisî€ƒretirementî€ƒasî€ƒanî€ƒadviserî€ƒtoî€ƒtheî€ƒcourtî€ƒatî€ƒaî€ƒstipendî€ƒofî€ƒ$5,000î€ƒperî€ƒyear.î€ƒTimî€ƒisî€ƒtheî€ƒtraditionalî€ƒ

directorî€ƒofî€ƒLuxemsteinâ€™sî€ƒonceî€ƒaî€ƒcenturyî€ƒanniversaryî€ƒcelebrations,î€ƒcomingî€ƒupî€ƒinî€ƒ10î€ƒyears.î€ƒHeî€ƒwouldî€ƒ

receiveî€ƒanî€ƒadditionalî€ƒhonorariumî€ƒofî€ƒ$40,000î€ƒperî€ƒyearî€ƒforî€ƒ2î€ƒyearsî€ƒbeforeî€ƒtheî€ƒcelebrationsî€ƒ(yearsî€ƒ9î€ƒandî€ƒ

10),î€ƒandî€ƒheî€ƒwantsî€ƒtoî€ƒreceiveî€ƒthoseî€ƒpaymentsî€ƒasî€ƒwell.î€ƒFinally,î€ƒheî€ƒwantsî€ƒtoî€ƒreceiveî€ƒaî€ƒlumpî€ƒsumî€ƒpaymentî€ƒ

ofî€ƒ$100,000î€ƒatî€ƒtheî€ƒretirementî€ƒdate.î€ƒKingî€ƒVincentî€ƒmakesî€ƒaî€ƒcounterî€ƒoffer,î€ƒâ€œWeî€ƒwillî€ƒpayî€ƒyouî€ƒanî€ƒextraî€ƒ

$130,000î€ƒperî€ƒyearî€ƒforî€ƒtheî€ƒnextî€ƒ5î€ƒyearsî€ƒandî€ƒaî€ƒlumpî€ƒsumî€ƒofî€ƒ$40,000î€ƒatî€ƒageî€ƒ65î€ƒifî€ƒyouî€ƒretireî€ƒnow.î€ƒAllî€ƒ

paymentsî€ƒcomeî€ƒatî€ƒyearî€ƒend.î€ƒTheî€ƒinterestî€ƒrateî€ƒisî€ƒ7%.î€ƒWhichî€ƒalternativeî€ƒgivesî€ƒTimî€ƒtheî€ƒhighestî€ƒpresentî€ƒ

value,î€ƒusingî€ƒexpectedî€ƒlives?î€ƒ

î€ƒ

Questionî€ƒ4:î€ƒ(Bonds)î€ƒ

Donaldî€ƒhasî€ƒjustî€ƒpurchasedî€ƒaî€ƒ10î€ƒyearî€ƒbondî€ƒofî€ƒWorldCheeseî€ƒCorporation.î€ƒTheî€ƒbondî€ƒhasî€ƒaî€ƒcouponî€ƒrateî€ƒofî€ƒ

8%î€ƒpayableî€ƒannually.î€ƒTheî€ƒrequiredî€ƒrateî€ƒofî€ƒreturnî€ƒisî€ƒ9%.î€ƒSupposeî€ƒoneî€ƒyearî€ƒlaterî€ƒrequiredî€ƒrateî€ƒofî€ƒreturnî€ƒ

declinedî€ƒtoî€ƒ7%î€ƒandî€ƒstayedî€ƒatî€ƒthatî€ƒlevelî€ƒforî€ƒtheî€ƒremainingî€ƒyears.î€ƒIfî€ƒDonaldî€ƒsellsî€ƒtheî€ƒbondsî€ƒoneî€ƒyearî€ƒafterî€ƒ

purchaseî€ƒthenî€ƒwhatî€ƒwouldî€ƒhisî€ƒcurrentî€ƒyield,î€ƒcapitalî€ƒgainî€ƒyieldî€ƒandî€ƒtheî€ƒtotalî€ƒyieldî€ƒbe?î€ƒî€ƒ

î€ƒ

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