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TVM Problems Answers.docx

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Sofy Carayannopoulos

BU 111 Time Value of Money Problems- Answer Key Problems: Problem #1 Tiffany has decided to deposit $1,200 into an account earning 4.75% per year for 40 years. How much will she have in her account at the end of the 40 year period? Solution: r = .0475 n = 40 PMT = $1,200 FV ordinary annuityT (1 + r) – 1 r FV ordinary annuity $1,200 (1 + .0475) - 1 .0475 FV = $136,414.09 Problem #2 Christina wants to purchase a lottery ticket. Currently, there are 3 different lottery options she can choose from. Which lottery ticket should she purchase given that the interest rate is 5%? a) Annual payments of $50,000 for 3 years starting immediately b) Annual payments of $52,000 for 3 years starting one year from now c) A bonus of $20,000 immediately and annual payments of $45,000 starting one year from now Problem #3 Dave needs $2,000,000 in order to retire and is able to save up $25,000 per year. With an interest rate of 6%, how many years will Dave have to work before retiring? Problem #4 Tosha and her best friend Rebecca have decided to purchase a house in Waterloo that they can live in for the next three years and then rent to students. The house th
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