ACCT 3001 Chapter : Chapter 6 Class Examples

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15 Mar 2019

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How much will you have in two years: invest ,000 now at 8%. Assume your investment opportunity cost is 8% compounded quarterly. Chapter 6 time value of money: you want to buy a new laptop. The store gives you three different payment options: cash now, /month for 20 months, down and /month for 15 months. The interest rate the store charges is 24% and is compounded monthly. Which alternative will you choose: you win a lottery. You can either receive ,000 now or ,000 a year for 20 years at the beginning of each year. Assume you plan to invest in nice, safe treasury bonds at 5%, compounded annually. You plan to retire at 65 and anticipate living until you are 90. You want to withdraw ,000 per year and will put your money in safe investments that will earn.

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5. An investment proposal has an outlat of $60.000 today and annual cash inflow of $15,000 from year 1 to year 6. Find its net present value of the required rate of return is 15%. Is the investment viable?

6. A debt of $5,300 due in four years and another $11,500 due in twelve years will be settled by making two equal payment, one at the end of six years and the other at the end of 9 years, Find the total payment assuming that money is worth 8% compounded quarterly. Use the twelve years as a focal date.

7. On 5 februrary 2012, Anna borrows $80,000 and agree to repay the loan in 110 days at 9% per annum simple interest, Find the simple amount of the loan and the settlement date of the loan, Using the bankers rule

8. The net price of an item listed for $1,500 after deducting trade discount of 20%, 15% and x% is $969. FInd X

9. AAA and BBB need an additional $6565 for a down payment on a home they hope to buy in 2 years, They invest $808 at the end of each quarter in an account earning6% compounded quarterly. Find the amount of the annuity and the interest earned.

10. Find the value in 2 years time of $4,444 invested at 5% compounded annually. In the following 2 years, the interest rate is expected to rise to 8%. Find the value of the investment at the end of the 4 years period, and find the overall percentage increase.

11. A debt of $5,555 due 5 month ago and another $8,888 due in 12 month are to be settled by making three equal payment. One at the end of the two months, One at the end of six months and the other at the end of ten months. Find the size of payment using. the seconf month as the focal date. Assuming money is worth 9% per annum simple interest.

12. Four years ago John borrowed $3000 from Arlette. The principal with interest at 10% compounded semi-annually is to be repaid six years from the date of the loan. Fifteen month ago, John borrowed another $1500 for 3 and haly year at 9% compounded quarterly. John is now proposing to settle both debts with two equal payment to be made 2 and 3 and half years from now. what should the payment be if money now earns 8% compounded quarterly.

13. Mathew buys a house for $250,000, He makes a 10% down payment and finances the balance through a bank for 25 years. A. if the interest rate is 7% compounded monthly, find the monthly payment that Mathew has to make to settle the loan. How much is the total interest charged? B. Suppose Mathew misses the first four payments. How much should he pay on the fifth month if he wants to settle the outstanding arrears? C. Immediately after paying for 15 years, Mathwe wants to settle the loan in full, How much is the amount he needs to pay?

14. Nania bough a piece of land for $150,000, She made an initial down payment of $40,000 and the balanced is financed through a bank. For the repayment of the bank loan, She has to pay $1975.50 a month. A) If the bank rate is 12% compounded monthly, Find the number of monthly payment that will settle the loan. B) If Nania intends to settle the loan by making a final payment immediately after paying the first 40 monthly payment, Find the value of this payment. What is the total interest payment she has to pay? C) If Nania intends to settle the loan by making a final payment on the 41st payment immediately after paying the first 40 monthly payments, Find the value of this payment.

15a. What is an annuity?

b. Fatimah purchased a house costing $450,000. She made a down payment of 10%, The balance was borrowed from Capital one bank which charges 9% compounded monthly. to setle the loan, Fatimah had to make equal monthly payment for 15 years.

i) How much is the down payment ii) Find Fatimah's Monthly payment iii) Find the total interst that she has to pay.

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You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 5% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows: Year Projected Cash Flow 1 $94,000 2 $114,000 3 $134,000 4 $114,000 5 $94,000 Based on this information, answer the following questions: 1) How much money will be in the bank account if you leave the $300,000 alone until you need it in five years? 2) If you undertake the investment opportunity, what is the Nominal Payback Period? 3) Using the Present Value factors for 6% (which can be found on any PV Factor table), what is the discounted Payback Period of the investment opportunity? 4) What is the Net Present Value at 6% of the investment opportunity? 5) Which option (make the investment or leave the money in a savings account) would you recommend to your CEO? Why? What additional factors/information might make you change your point of view?

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Part I:
Solve 4 of the following time value of money problems by filling inthe 4 columns to the right of the description.
Be sure to solve 1 problem from each of the following 4 categorieslisted under Problem Types. I have completed the first row as anexample.

Part II:
Discuss how you may use time value of money concepts in yourpersonal life. For example, saving for college tuition orretirement, paying off a car loan or home mortgage. Give specificdetails as to how you would use these formulas for more effectivedecision making. Create 1 description and fill in the table foryour newly created question.

Problem Types:
1 pv = present value of $1
2 fv = future value of $1
3 PVAo = Present Value of an Ordinary Annuity of$1 (payment at end of period)
4 FVAo = Future Value of an Annuity of $1(payment at end of period)

	Description	Type of Problem	Table	Formula	Answer
1	How much money must your rich unclegive you now to finance four years of college, assuming an annualcost of $48,000 and an interest rate of 6% (applied to theprincipal until disbursed)?	Present Value of anordinary Annuity	PVAo	PV = 48,000(3.465)	$166,325.07
2	How much interest would you earn ifyou deposited $300 at 6 percent for 27 months?
3	If you deposit $2,000 in a 5-yearcertificate of deposit at 5.2%, how much will it be worth in fiveyears?
4	How much interest would you pay toborrow $670 for eight months at 12 percent?
5	You wish to borrow $18,000 to buy anew auto-mobile. Rate is 8.6% over five years with monthlypayments. Find the monthly payment.
6	What is the future value of $800 at8 percent after six years?
7	How much would you have in savingsif you kept $200 on deposit for eight years at 8% compoundedsemiannually?
8	You choose to invest $50/month in a401(k) that invests in an international stock mutual fund. Assumingan annual rate of return of 9%, how much will this fund worth ifretiring in forty years?
9	What is the future value of anannual deposit of $230 earning 6 percent for 15years?
10	If you invest $600/Year in a 401(k)that invests in an international stock mutual fund. Assuming anannual rate of return of 9%, how much will this fund worth ifretiring in forty years?
11	What amount would you have in aretirement account if you made annual deposits of $375 for 25 yearsearning 12 percent, compounded annually?
12	What is the present value of $2,200earning 15 percent for eight years?
13	How much money must you set asideat age 20 to accumulate retirement funds of $100,000 at age 65,assuming a rate of interest of 7%?
14	To have $6,000 for a childâseducation in 10 years, what amount should a parent deposit in asavings account that earns 12 percent, compoundedquarterly?
15	If you deposit $2,000 in a 5-yearcertificate of deposit at 5.2% with quarterly compounding, how muchwill it be worth in five years?
16	What is the present value of awithdrawal of $200 at the end of each year for 14 years with aninterest rate of 7 percent?
17	How much would you have to depositnow to be able to withdraw $650 at the end of each year for 20years from an account that earns 11 percent?
18	What would be the annual paymentamount for a $20,000, 10-year loan at 7 percent?

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