6
DISCOUNTED CHAPTER CASH FLOW VALUATION
Answers to Concepts Review and Critical Thinking Questions
1.
The four pieces are the present value (PV), the periodic cash flow (C), the discount rate (r), and the
number of payments, or the life of the annuity, t.
2.
Assuming positive cash flows, both the present and the future values will rise.
3.
Assuming positive cash flows, the present value will fall and the future value will rise.
4.
Its deceptive, but very common. The basic concept of time value of money is that a dollar today is
not worth the same as a dollar tomorrow. The deception is particularly irritating given that such
lotteries are usually government sponsored!
5.
If the total money is fixed, you want as much as possible as soon as possible. The team (or, more
accurately, the team owner) wants just the opposite.
6.
The better deal is the one with equal installments.
7.
Yes, they should. APRs generally dont provide the relevant rate. The only advantage is that they are
easier to compute, but, with modern computing equipment, that advantage is not very important.
8.
A freshman does. The reason is that the freshman gets to use the money for much longer before
interest starts to accrue. The subsidy is the present value (on the day the loan is made) of the interest
that would have accrued up until the time it actually begins to accrue.
9.
The problem is that the subsidy makes it easier to repay the loan, not obtain it. However, ability to
repay the loan depends on future employment, not current need. For example, consider a student
who is currently needy, but is preparing for a career in a high-paying area (such as corporate
finance!). Should this student receive the subsidy? How about a student who is currently not needy,
but is preparing for a relatively low-paying job (such as becoming a college professor)?
B-68 SOLUTIONS
10. In general, viatical settlements are ethical. In the case of a viatical settlement, it is simply an
exchange of cash today for payment in the future, although the payment depends on the death of the
seller. The purchaser of the life insurance policy is bearing the risk that the insured individual will
live longer than expected. Although viatical settlements are ethical, they may not be the best choice
for an individual. In a Business Week article (October 31, 2005), options were examined for a 72
year old male with a life expectancy of 8 years and a $1 million dollar life insurance policy with an
annual premium of $37,000. The four options were: 1) Cash the policy today for $100,000. 2) Sell
the policy in a viatical settlement for $275,000. 3) Reduce the death benefit to $375,000, which
would keep the policy in force for 12 years without premium payments. 4) Stop paying premiums
and dont reduce the death benefit. This will run the cash value of the policy to zero in 5 years, but
the viatical settlement would be worth $475,000 at that time. If he died within 5 years, the
beneficiaries would receive $1 million. Ultimately, the decision rests on the individual on what they
perceive as best for themselves. The values that will affect the value of the viatical settlement are the
discount rate, the face value of the policy, and the health of the individual selling the policy.
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this
solutions manual, rounding may appear to have occurred. However, the final answer for each problem is
found without rounding during any step in the problem.
Basic
1.
To solve this problem, we must find the PV of each cash flow and add them. To find the PV of a
lump sum, we use:
PV = FV / (1 + r)t
PV@10% = $1,100 / 1.10 + $720 / 1.102 + $940 / 1.103 + $1,160 / 1.104 = $3,093.57
PV@18% = $1,100 / 1.18 + $720 / 1.182 + $940 / 1.183 + $1,160 / 1.184 = $2,619.72
PV@24% = $1,100 / 1.24 + $720 / 1.242 + $940 / 1.243 + $1,160 / 1.244 = $2,339.03
2.
To find the PVA, we use the equation:
PVA = C({1 [1/(1 + r)]t } / r )
At a 5 percent interest rate:
X@5%: PVA = $7,000{[1 (1/1.05)8 ] / .05 } = $45,242.49
Y@5%: PVA = $9,000{[1 (1/1.05)5 ] / .05 } = $38,965.29
CHAPTER 6 B-69
And at a 22 percent interest rate:
X@22%: PVA = $7,000{[1 (1/1.22)8 ] / .22 } = $25,334.87
Y@22%: PVA = $9,000{[1 (1/1.22)5 ] / .22 } = $25,772.76
Notice that the PV of cash flow X has a greater PV at a 5 percent interest rate, but a lower PV at a 22
percent interest rate. The reason is that X has greater total cash flows. At a lower interest rate, the
total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a
higher interest rate, Y is more valuable since it has larger cash flows. At the higher interest rate,
these bigger cash flows early are more important since the cost of waiting (the interest rate) is so
much greater.
3.
To solve this problem, we must find the FV of each cash flow and add them. To find the FV of a
lump sum, we use:
FV = PV(1 + r)t
FV@8% = $700(1.08)3 + $950(1.08)2 + $1,200(1.08) + $1,300 = $4,585.88
FV@11% = $700(1.11)3 + $950(1.11)2 + $1,200(1.11) + $1,300 = $4,759.84
FV@24% = $700(1.24)3 + $950(1.24)2 + $1,200(1.24) + $1,300 = $5,583.36
Notice we are finding the value at Year 4, the cash flow at Year 4 is simply added to the FV of the
other cash flows. In other words, we do not need to compound this cash flow.
4.
To find the PVA, we use the equation:
PVA = C({1 [1/(1 + r)]t } / r )
PVA@15 yrs:
PVA = $4,600{[1 (1/1.08)15 ] / .08} = $39,373.60
PVA@40 yrs:
PVA = $4,600{[1 (1/1.08)40 ] / .08} = $54,853.22
PVA@75 yrs:
PVA = $4,600{[1 (1/1.08)75 ] / .08} = $57,320.99
To find the PV of a perpetuity, we use the equation:
PV = C / r
PV = $4,600 / .08 = $57,500.00
Notice that as the length of the annuity payments increases, the present value of the annuity
approaches the present value of the perpetuity. The present value of the 75 year annuity and the
present value of the perpetuity imply that the value today of all perpetuity payments beyond 75 years
is only $179.01.
B-70 SOLUTIONS
5.
Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the
annuity payment. Using the PVA equation:
PVA = C({1 [1/(1 + r)]t } / r )
PVA = $28,000 = $C{[1 (1/1.0825)15 ] / .0825}
We can now solve this equation for the annuity payment. Doing so, we get:
C = $28,000 / 8.43035 = $3,321.33
6.
To find the PVA, we use the equation:
PVA = C({1 [1/(1 + r)]t } / r )
PVA = $65,000{[1 (1/1.085)8 ] / .085} = $366,546.89
7.
Here we need to find the FVA. The equation to find the FVA is:
FVA = C{[(1 + r)t 1] / r}
FVA for 20 years = $3,000[(1.10520 1) / .105] = $181,892.42
FVA for 40 years = $3,000[(1.10540 1) / .105] = $1,521,754.74
Notice that because of exponential growth, doubling the number of periods does not merely double
the FVA.
8.
Here we have the FVA, the length of the annuity, and the interest rate. We want to calculate the
annuity payment. Using the FVA equation:
FVA = C{[(1 + r)t 1] / r}
$80,000 = $C[(1.06510 1) / .065]
We can now solve this equation for the annuity payment. Doing so, we get:
C = $80,000 / 13.49442 = $5,928.38
9.
Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the
annuity payment. Using the PVA equation:
PVA = C({1 [1/(1 + r)]t } / r)
$30,000 = C{[1 (1/1.08)7 ] / .08}
We can now solve this equation for the annuity payment. Doing so, we get:
C = $30,000 / 5.20637 = $5,762.17
10. This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation:
PV = C / r
PV = $20,000 / .08 = $250,000.00
CHAPTER 6 B-71
11. Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash
flows. Using the PV of a perpetuity equation:
PV = C / r
$280,000 = $20,000 / r
We can now solve for the interest rate as follows:
r = $20,000 / $280,000 = .0714 or 7.14%
12. For discrete compounding, to find the EAR, we use the equation:
EAR = [1 + (APR / m)]m 1
EAR = [1 + (.07 / 4)]4 1
= .0719 or 7.19%
EAR = [1 + (.18 / 12)]12 1
= .1956 or 19.56%
EAR = [1 + (.10 / 365)]365 1 = .1052 or 10.52%
To find the EAR with continuous compounding, we use the equation:
EAR = eq 1
EAR = e.14 1 = .1503 or 15.03%
13. Here we are given the EAR and need to find the APR. Using the equation for discrete compounding:
EAR = [1 + (APR / m)]m 1
We can now solve for the APR. Doing so, we get:
APR = m[(1 + EAR)1/m 1]
EAR = .1220 = [1 + (APR / 2)]2 1
APR = 2[(1.1220)1/2 1]
= .1185 or 11.85%
EAR = .0940 = [1 + (APR / 12)]12 1
APR = 12[(1.0940)1/12 1]
= .0902 or 9.02%
EAR = .0860 = [1 + (APR / 52)]52 1
APR = 52[(1.0860)1/52 1]
= .0826 or 8.26%
Solving the continuous compounding EAR equation:
EAR = eq 1
We get:
APR = ln(1 + EAR)
APR = ln(1 + .2380)
APR = .2135 or 21.35%
B-72 SOLUTIONS
14. For discrete compounding, to find the EAR, we use the equation:
EAR = [1 + (APR / m)]m 1
So, for each bank, the EAR is:
First National: EAR = [1 + (.1310 / 12)]12 1 = .1392 or 13.92%
First United:
EAR = [1 + (.1340 / 2)]2 1 = .1385 or 13.85%
Notice that the higher APR does not necessarily mean the higher EAR. The number of compounding
periods within a year will also affect the EAR.
15. The reported rate is the APR, so we need to convert the EAR to an APR as follows:
EAR = [1 + (APR / m)]m 1
APR = m[(1 + EAR)1/m 1]
APR = 365[(1.14)1/365 1] = .1311 or 13.11%
This is deceptive because the borrower is actually paying annualized interest of 14% per year, not
the 13.11% reported on the loan contract.
16. For this problem, we simply need to find the FV of a lump sum using the equation:
FV = PV(1 + r)t
It is important to note that compounding occurs semiannually. To account for this, we will divide the
interest rate by two (the number of compounding periods in a year), and multiply the number of
periods by two. Doing so, we get:
FV = $1,400[1 + (.096/2)]40 = $9,132.28
17. For this problem, we simply need to find the FV of a lump sum using the equation:
FV = PV(1 + r)t
It is important to note that compounding occurs daily. To account for this, we will divide the interest
rate by 365 (the number of days in a year, ignoring leap year), and multiply the number of periods by
365. Doing so, we get:
FV in 5 years = $6,000[1 + (.084/365)]5(365) = $9,131.33
FV in 10 years = $6,000[1 + (.084/365)]10(365) = $13,896.86
FV in 20 years = $6,000[1 + (.084/365)]20(365) = $32,187.11
CHAPTER 6 B-73
18. For this problem, we simply need to find the PV of a lump sum using the equation:
PV = FV / (1 + r)t
It is important to note that compounding occurs daily. To account for this, we will divide the interest
rate by 365 (the number of days in a year, ignoring leap year), and multiply the number of periods by
365. Doing so, we get:
PV = $45,000 / [(1 + .11/365)6(365)] = $23,260.62
19. The APR is simply the interest rate per period times the number of periods in a year. In this case, the
interest rate is 25 percent per month, and there are 12 months in a year, so we get:
APR = 12(25%) = 300%
To find the EAR, we use the EAR formula:
EAR = [1 + (APR / m)]m 1
EAR = (1 + .25)12 1 = 1,355.19%
Notice that we didnt need to divide the APR by the number of compounding periods per year. We
do this division to get the interest rate per period, but in this problem we are already given the
interest rate per period.
20. We first need to find the annuity payment. We have the PVA, the length of the annuity, and the
interest rate. Using the PVA equation:
PVA = C({1 [1/(1 + r)]t } / r)
$61,800 = $C[1 {1 / [1 + (.074/12)]60} / (.074/12)]
Solving for the payment, we get:
C = $61,800 / 50.02385 = $1,235.41
To find the EAR, we use the EAR equation:
EAR = [1 + (APR / m)]m 1
EAR = [1 + (.074 / 12)]12 1 = .0766 or 7.66%
21. Here we need to find the length of an annuity. We know the interest rate, the PV, and the payments.
Using the PVA equation:
PVA = C({1 [1/(1 + r)]t } / r)
$17,000 = $300{[1 (1/1.009)t ] / .009}
B-74 SOLUTIONS
Now we solve for t:
1/1.009t = 1 {[($17,000)/($300)](.009)}
1/1.009t = 0.49
1.009t = 1/(0.49) = 2.0408
t = ln 2.0408 / ln 1.009 = 79.62 months
22. Here we are trying to find the interest rate when we know the PV and FV. Using the FV equation:
FV = PV(1 + r)
$4 = $3(1 + r)
r = 4/3 1 = 33.33% per week
The interest rate is 33.33% per week. To find the APR, we multiply this rate by the number of weeks
in a year, so:
APR = (52)33.33% = 1,733.33%
And using the equation to find the EAR:
EAR = [1 + (APR / m)]m 1
EAR = [1 + .3333]52 1 = 313,916,515.69%
23. Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash
flows. Using the PV of a perpetuity equation:
PV = C / r
$63,000 = $1,200 / r
We can now solve for the interest rate as follows:
r = $1,200 / $63,000 = .0190 or 1.90% per month
The interest rate is 1.90% per month. To find the APR, we multiply this rate by the number of
months in a year, so:
APR = (12)1.90% = 22.86%
And using the equation to find an EAR:
EAR = [1 + (APR / m)]m 1
EAR = [1 + .0190]12 1 = 25.41%
24. This problem requires us to find the FVA. The equation to find the FVA is:
FVA = C{[(1 + r)t 1] / r}
FVA = $250[{[1 + (.10/12) ]360 1} / (.10/12)] = $565,121.98
CHAPTER 6 B-75
25. In the previous problem, the cash flows are monthly and the compounding period is monthly. This
assumption still holds. Since the cash flows are annual, we need to use the EAR to calculate the
future value of annual cash flows. It is important to remember that you have to make sure the
compounding periods of the interest rate times with the cash flows. In this case, we have annual cash
flows, so we need the EAR since it is the true annual interest rate you will earn. So, finding the EAR:
EAR = [1 + (APR / m)]m 1
EAR = [1 + (.10/12)]12 1 = .1047 or 10.47%
Using the FVA equation, we get:
FVA = C{[(1 + r)t 1] / r}
FVA = $3,000[(1.104730 1) / .1047] = $539,686.21
26. The cash flows are simply an annuity with four payments per year for four years, or 16 payments.
We can use the PVA equation:
PVA = C({1 [1/(1 + r)]t } / r)
PVA = $1,500{[1 (1/1.0075)16] / .0075} = $22,536.47
27. The cash flows are annual and the compounding period is quarterly, so we need to calculate the EAR
to make the interest rate comparable with the timing of the cash flows. Using the equation for the
EAR, we get:
EAR = [1 + (APR / m)]m 1
EAR = [1 + (.11/4)]4 1 = .1146 or 11.46%
And now we use the EAR to find the PV of each cash flow as a lump sum and add them together:
PV = $900 / 1.1146 + $850 / 1.11462 + $1,140 / 1.11464 = $2,230.20
28. Here the cash flows are annual and the given interest rate is annual, so we can use the interest rate
given. We simply find the PV of each cash flow and add them together.
PV = $2,800 / 1.0845 + $5,600 / 1.08453 + $1,940 / 1.08454 = $8,374.62
Intermediate
29. The total interest paid by First Simple Bank is the interest rate per period times the number of
periods. In other words, the interest by First Simple Bank paid over 10 years will be:
.06(10) = .6
First Complex Bank pays compound interest, so the interest paid by this bank will be the FV factor
of $1, or:
(1 + r)10
B-76 SOLUTIONS
Setting the two equal, we get:
(.06)(10) = (1 + r)10 1
r = 1.61/10 1 = .0481 or 4.81%
30. Here we need to convert an EAR into interest rates for different compounding periods. Using the
equation for the EAR, we get:
EAR = [1 + (APR / m)]m 1
EAR = .18 = (1 + r)2 1;
r = (1.18)1/2 1
= .0863 or 8.63% per six months
EAR = .18 = (1 + r)4 1;
r = (1.18)1/4 1
= .0422 or 4.22% per quarter
EAR = .18 = (1 + r)12 1;
r = (1.18)1/12 1
= .0139 or 1.39% per month
Notice that the effective six month rate is not twice the effective quarterly rate because of the effect
of compounding.
31. Here we need to find the FV of a lump sum, with a changing interest rate. We must do this problem
in two parts. After the first six months, the balance will be:
FV = $5,000 [1 + (.025/12)]6 = $5,062.83
This is the balance in six months. The FV in another six months will be:
FV = $5,062.83 [1 + (.17/12)]6 = $5,508.70
The problem asks for the interest accrued, so, to find the interest, we subtract the beginning balance
from the FV. The interest accrued is:
Interest = $5,508.70 5,000.00 = $508.70
32. We need to find the annuity payment in retirement. Our retirement savings ends and the retirement
withdrawals begin, so the PV of the retirement withdrawals will be the FV of the retirement savings.
So, we find the FV of the stock account and the FV of the bond account and add the two FVs.
Stock account: FVA = $600[{[1 + (.12/12) ]360 1} / (.12/12)] = $2,096,978.48
Bond account: FVA = $300[{[1 + (.07/12) ]360 1} / (.07/12)] = $365,991.30
So, the total amount saved at retirement is:
$2,096,978.48 + 365,991.30 = $2,462,969.78
Solving for the withdrawal amount in retirement using the PVA equation gives us:
PVA = $2,462,969.78 = $C[1 {1 / [1 + (.09/12)]300} / (.09/12)]
C = $2,462,969.78 / 119.1616 = $20,669.15 withdrawal per month
CHAPTER 6 B-77
33. We need to find the FV of a lump sum in one year and two years. It is important that we use the
number of months in compounding since interest is compounded monthly in this case. So:
FV in one year = $1(1.0108)12 = $1.14
FV in two years = $1(1.0108)24 = $1.29
There is also another common alternative solution. We could find the EAR, and use the number of
years as our compounding periods. So we will find the EAR first:
EAR = (1 + .0108)12 1 = .1376 or 13.76%
Using the EAR and the number of years to find the FV, we get:
FV in one year = $1(1.1376)1 = $1.14
FV in two years = $1(1.1376)2 = $1.29
Either method is correct and acceptable. We have simply made sure that the interest compounding
period is the same as the number of periods we use to calculate the FV.
34. Here we are finding the annuity payment necessary to achieve the same FV. The interest rate given
is a 10 percent APR, with monthly deposits. We must make sure to use the number of months in the
equation. So, using the FVA equation:
FVA in 40 years = C[{[1 + (.11/12) ]480 1} / (.11/12)]
C = $1,000,000 / 8,600.127 = $116.28
FVA in 30 years = C[{[1 + (.11/12) ]360 1} / (.11/12)]
C = $1,000,000 / 2,804.52 = $356.57
FVA in 20 years = C[{[1 + (.11/12) ]240 1} / (.11/12)]
C = $1,000,000 / 865.638 = $1,155.22
Notice that a deposit for half the length of time, i.e. 20 years versus 40 years, does not mean that the
annuity payment is doubled. In this example, by reducing the savings period by one-half, the deposit
necessary to achieve the same terminal value is about nine times as large.
35. Since we are looking to quadruple our money, the PV and FV are irrelevant as long as the FV is four
times as large as the PV. The number of periods is four, the number of quarters per year. So:
FV = $4 = $1(1 + r)(12/3)
r = .4142 or 41.42%
B-78 SOLUTIONS
36. Since we have an APR compounded monthly and an annual payment, we must first convert the
interest rate to an EAR so that the compounding period is the same as the cash flows.
EAR = [1 + (.10 / 12)]12 1 = .104713 or 10.4713%
PVA1 = $90,000 {[1 (1 / 1.104713)2] / .104713} = $155,215.98
PVA2 = $45,000 + $65,000{[1 (1/1.104713)2] / .104713} = $157,100.43
You would choose the second option since it has a higher PV.
37. We can use the present value of a growing perpetuity equation to find the value of your deposits
today. Doing so, we find:
PV = C {[1/(r g)] [1/(r g)] [(1 + g)/(1 + r)]t}
PV = $1,000,000{[1/(.09 .05)] [1/(.09 .05)] [(1 + .05)/(1 + .09)]25}
PV = $15,182,293.68
38. Since your salary grows at 4 percent per year, your salary next year will be:
Next years salary = $50,000 (1 + .04)
Next years salary = $52,000
This means your deposit next year will be:
Next years deposit = $52,000(.02)
Next years deposit = $1,040
Since your salary grows at 4 percent, you deposit will also grow at 4 percent. We can use the present
value of a growing perpetuity equation to find the value of your deposits today. Doing so, we find:
PV = C {[1/(r g)] [1/(r g)] [(1 + g)/(1 + r)]t}
PV = $1,040{[1/(.10 .04)] [1/(.10 .04)] [(1 + .04)/(1 + .10)]40}
PV = $15,494.64
Now, we can find the future value of this lump sum in 40 years. We find:
FV = PV(1 + r)t
FV = $15,494.64(1 + .10)40
FV = $701,276.07
This is the value of your savings in 40 years.
CHAPTER 6 B-79
39. The relationship between the PVA and the interest rate is:
PVA falls as r increases, and PVA rises as r decreases
FVA rises as r increases, and FVA falls as r decreases
The present values of $7,000 per year for 10 years at the various interest rates given are:
PVA@10% = $7,000{[1 (1/1.10)10] / .10} = $43,011.97
PVA@5% = $7,000{[1 (1/1.05)10] / .05} = $54,052.14
PVA@15% = $7,000{[1 (1/1.15)10] / .15} = $35,131.38
40. Here we are given the FVA, the interest rate, and the amount of the annuity. We need to solve for the
number of payments. Using the FVA equation:
FVA = $20,000 = $225[{[1 + (.09/12)]t 1 } / (.09/12)]
Solving for t, we get:
1.0075t = 1 + [($20,000)/($225)](.09/12)
t = ln 1.66667 / ln 1.0075 = 68.37 payments
41. Here we are given the PVA, number of periods, and the amount of the annuity. We need to solve for
the interest rate. Using the PVA equation:
PVA = $55,000 = $1,120[{1 [1 / (1 + r)]60}/ r]
To find the interest rate, we need to solve this equation on a financial calculator, using a spreadsheet,
or by trial and error. If you use trial and error, remember that increasing the interest rate lowers the
PVA, and increasing the interest rate decreases the PVA. Using a spreadsheet, we find:
r = 0.682%
The APR is the periodic interest rate times the number of periods in the year, so:
APR = 12(0.682%) = 8.18%
B-80 SOLUTIONS
42. The amount of principal paid on the loan is the PV of the monthly payments you make. So, the
present value of the $1,100 monthly payments is:
PVA = $1,100[(1 {1 / [1 + (.068/12)]}360) / (.068/12)] = $168,731.02
The monthly payments of $1,100 will amount to a principal payment of $168,731.02. The amount of
principal you will still owe is:
$220,000 168,731.02 = $51,268.98
This remaining principal amount will increase at the interest rate on the loan until the end of the loan
period. So the balloon payment in 30 years, which is the FV of the remaining principal will be:
Balloon payment = $51,268.98 [1 + (.068/12)]360 = $392,025.82
43. We are given the total PV of all four cash flows. If we find the PV of the three cash flows we know, and
subtract them from the total PV, the amount left over must be the PV of the missing cash flow. So, the
PV of the cash flows we know are:
PV of Year 1 CF: $1,500 / 1.10 = $1,363.64
PV of Year 3 CF: $1,800 / 1.103 = $1,352.37
PV of Year 4 CF: $2,400 / 1.104 = $1,639.23
So, the PV of the missing CF is:
$6,785 1,363.64 1,352.37 1,639.23 = $2,429.76
The question asks for the value of the cash flow in Year 2, so we must find the future value of this
amount. The value of the missing CF is:
$2,429.76(1.10)2 = $2,940.02
44. To solve this problem, we simply need to find the PV of each lump sum and add them together. It is
important to note that the first cash flow of $1 million occurs today, so we do not need to discount
that cash flow. The PV of the lottery winnings is:
$1,000,000 + $1,400,000/1.09 + $1,800,000/1.092 + $2,200,000/1.093 + $2,600,000/1.094 +
$3,000,000/1.095 + $3,400,000/1.096 + $3,800,000/1.097 + $4,200,000/1.098 +
$4,600,000/1.099 + $5,000,000/1.0910 = $19,733,830.26
45. Here we are finding interest rate for an annuity cash flow. We are given the PVA, number of periods,
and the amount of the annuity. We need to solve for the number of payments. We should also note
that the PV of the annuity is not the amount borrowed since we are making a down payment on the
warehouse. The amount borrowed is:
Amount borrowed = 0.80($2,400,000) = $1,920,000
CHAPTER 6 B-81
Using the PVA equation:
PVA = $1,920,000 = $13,000[{1 [1 / (1 + r)]360}/ r]
Unfortunately this equation cannot be solved to find the interest rate using algebra. To find the
interest rate, we need to solve this equation on a financial calculator, using a spreadsheet, or by trial
and error. If you use trial and error, remember that increasing the interest rate lowers the PVA, and
increasing the interest rate decreases the PVA. Using a spreadsheet, we find:
r = 0.598%
The APR is the monthly interest rate times the number of months in the year, so:
APR = 12(0.598%) = 7.17%
And the EAR is:
EAR = (1 + .00598)12 1 = .0742 or 7.42%
46. The profit the firm earns is just the PV of the sales price minus the cost to produce the asset. We find
the PV of the sales price as the PV of a lump sum:
PV = $145,000 / 1.133 = $100,492.27
And the firms profit is:
Profit = $100,492.27 94,000.00 = $6,492.27
To find the interest rate at which the firm will break even, we need to find the interest rate using the
PV (or FV) of a lump sum. Using the PV equation for a lump sum, we get:
$94,000 = $145,000 / ( 1 + r)3
r = ($145,000 / $94,000)1/3 1 = .1554 or 15.54%
47. We want to find the value of the cash flows today, so we will find the PV of the annuity, and then
bring the lump sum PV back to today. The annuity has 17 payments, so the PV of the annuity is:
PVA = $2,000{[1 (1/1.10)17] / .10} = $16,043.11
Since this is an ordinary annuity equation, this is the PV one period before the first payment, so it is
the PV at t = 8. To find the value today, we find the PV of this lump sum. The value today is:
PV = $16,043.11 / 1.108 = $7,484.23
48. This question is asking for the present value of an annuity, but the interest rate changes during the
life of the annuity. We need to find the present value of the cash flows for the last eight years first.
The PV of these cash flows is:
PVA2 = $1,500 [{1 1 / [1 + (.10/12)]96} / (.10/12)] = $98,852.23
B-82 SOLUTIONS
Note that this is the PV of this annuity exactly seven years from today. Now we can discount this
lump sum to today. The value of this cash flow today is:
PV = $98,852.23 / [1 + (.13/12)]84 = $39,985.62
Now we need to find the PV of the annuity for the first seven years. The value of these cash flows
today is:
PVA1 = $1,500 [{1 1 / [1 + (.13/12)]84} / (.13/12)] = $82,453.99
The value of the cash flows today is the sum of these two cash flows, so:
PV = $39,985.62 + 82,453.99 = $122,439.62
49. Here we are trying to find the dollar amount invested today that will equal the FVA with a known
interest rate, and payments. First we need to determine how much we would have in the annuity
account. Finding the FV of the annuity, we get:
FVA = $1,000 [{[ 1 + (.095/12)]180 1} / (.095/12)] = $395,948.63
Now we need to find the PV of a lump sum that will give us the same FV. So, using the FV of a
lump sum with continuous compounding, we get:
FV = $395,948.63 = PVe.09(15)
PV = $395,948.63 e1.35 = $102,645.83
50. To find the value of the perpetuity at t = 7, we first need to use the PV of a perpetuity equation.
Using this equation we find:
PV = $5,000 / .057 = $87,719.30
Remember that the PV of a perpetuity (and annuity) equations give the PV one period before the first
payment, so, this is the value of the perpetuity at t = 14. To find the value at t = 7, we find the PV of
this lump sum as:
PV = $87,719.30 / 1.0577 = $59,507.30
51. To find the APR and EAR, we need to use the actual cash flows of the loan. In other words, the
interest rate quoted in the problem is only relevant to determine the total interest under the terms
given. The interest rate for the cash flows of the loan is:
PVA = $20,000 = $1,916.67{(1 [1 / (1 + r)]12 ) / r }
Again, we cannot solve this equation for r, so we need to solve this equation on a financial
calculator, using a spreadsheet, or by trial and error. Using a spreadsheet, we find:
r = 2.219% per month
CHAPTER 6 B-83
So the APR is:
APR = 12(2.219%) = 26.62%
And the EAR is:
EAR = (1.02219)12 1 = .3012 or 30.12%
52. The cash flows in this problem are semiannual, so we need the effective semiannual rate. The
interest rate given is the APR, so the monthly interest rate is:
Monthly rate = .10 / 12 = .00833
To get the semiannual interest rate, we can use the EAR equation, but instead of using 12 months as
the exponent, we will use 6 months. The effective semiannual rate is:
Semiannual rate = (1.00833)6 1 = .0511 or 5.11%
We can now use this rate to find the PV of the annuity. The PV of the annuity is:
PVA @ t = 9: $6,000{[1 (1 / 1.0511)10] / .0511} = $46,094.33
Note, this is the value one period (six months) before the first payment, so it is the value at t = 9. So,
the value at the various times the questions asked for uses this value 9 years from now.
PV @ t = 5: $46,094.33 / 1.05118 = $30,949.21
Note, you can also calculate this present value (as well as the remaining present values) using the
number of years. To do this, you need the EAR. The EAR is:
EAR = (1 + .0083)12 1 = .1047 or 10.47%
So, we can find the PV at t = 5 using the following method as well:
PV @ t = 5: $46,094.33 / 1.10474 = $30,949.21
The value of the annuity at the other times in the problem is:
PV @ t = 3: $46,094.33 / 1.051112 = $25,360.08
PV @ t = 3: $46,094.33 / 1.10476 = $25,360.08
PV @ t = 0: $46,094.33 / 1.051118 = $18,810.58
PV @ t = 0: $46,094.33 / 1.10479 = $18,810.58
53. a.
Calculating the PV of an ordinary annuity, we get:
PVA = $950{[1 (1/1.095)8 ] / .095} = $5,161.76
B-84 SOLUTIONS
b.
To calculate the PVA due, we calculate the PV of an ordinary annuity for t 1 payments, and
add the payment that occurs today. So, the PV of the annuity due is:
PVA = $950 + $950{[1 (1/1.095)7] / .095} = $5,652.13
54. We need to use the PVA due equation, that is:
PVAdue = (1 + r) PVA
Using this equation:
PVAdue = $61,000 = [1 + (.0815/12)] C[{1 1 / [1 + (.0815/12)]60} / (.0815/12)
$60,588.50 = $C{1 [1 / (1 + .0815/12)60]} / (.0815/12)
C = $1,232.87
Notice, when we find the payment for the PVA due, we simply discount the PV of the annuity due
back one period. We then use this value as the PV of an ordinary annuity.
55. The payment for a loan repaid with equal payments is the annuity payment with the loan value as the
PV of the annuity. So, the loan payment will be:
PVA = $36,000 = C {[1 1 / (1 + .09)5] / .09}
C = $9,255.33
The interest payment is the beginning balance times the interest rate for the period, and the principal
payment is the total payment minus the interest payment. The ending balance is the beginning
balance minus the principal payment. The ending balance for a period is the beginning balance for
the next period. The amortization table for an equal payment is:
Year
1
2
3
4
5
Beginning
Balance
$36,000.00
29,984.67
23,427.96
16,281.15
8,491.13
Total
Payment
$9,255.33
9,255.33
9,255.33
9,255.33
9,255.33
Interest
Payment
$3,240.00
2,698.62
2,108.52
1,465.30
764.20
Principal
Payment
$6,015.33
6,556.71
7,146.81
7,790.02
8,491.13
Ending
Balance
$29,984.67
23,427.96
16,281.15
8,491.13
0.00
In the third year, $2,108.52 of interest is paid.
Total interest over life of the loan = $3,240 + 2,698.62 + 2,108.52 + 1,465.30 + 764.20 = $10,276.64
CHAPTER 6 B-85
56. This amortization table calls for equal principal payments of $7,200 per year. The interest payment
is the beginning balance times the interest rate for the period, and the total payment is the principal
payment plus the interest payment. The ending balance for a period is the beginning balance for the
next period. The amortization table for an equal principal reduction is:
Year
1
2
3
4
5
Beginning
Balance
$36,000.00
28,800.00
21,600.00
14,400.00
7,200.00
Total
Payment
$10,440.00
9,792.00
9,144.00
8,496.00
7,848.00
Interest
Payment
$3,240.00
2,592.00
1,944.00
1,296.00
648.00
Principal
Payment
$7,200.00
7,200.00
7,200.00
7,200.00
7,200.00
Ending
Balance
$28,800.00
21,600.00
14,400.00
7,200.00
0.00
In the third year, $1,944 of interest is paid.
Total interest over life of the loan = $3,240 + 2,592 + 1,944 + 1,296 + 648 = $9,720
Notice that the total payments for the equal principal reduction loan are lower. This is because more
principal is repaid early in the loan, which reduces the total interest expense over the life of the loan.
Challenge
57. The cash flows for this problem occur monthly, and the interest rate given is the EAR. Since the cash
flows occur monthly, we must get the effective monthly rate. One way to do this is to find the APR
based on monthly compounding, and then divide by 12. So, the pre-retirement APR is:
EAR = .11 = [1 + (APR / 12)]12 1;
APR = 12[(1.11)1/12 1] = 10.48%
And the post-retirement APR is:
EAR = .08 = [1 + (APR / 12)]12 1;
APR = 12[(1.08)1/12 1] = 7.72%
First, we will calculate how much he needs at retirement. The amount needed at retirement is the PV
of the monthly spending plus the PV of the inheritance. The PV of these two cash flows is:
PVA = $20,000{1 [1 / (1 + .0772/12)12(20)]} / (.0772/12) = $2,441,554.61
PV $750,000 = / [1 + (.0772/12)]240 = $160,911.16
So, at retirement, he needs:
$2,441,544.61 + 160,911.16 = $2,602,465.76
He will be saving $2,100 per month for the next 10 years until he purchases the cabin. The value of
his savings after 10 years will be:
FVA = $2,000[{[ 1 + (.1048/12)]12(10) 1} / (.1048/12)] = $421,180.66
B-86 SOLUTIONS
After he purchases the cabin, the amount he will have left is:
$421,180.66 325,000 = $96,180.66
He still has 20 years until retirement. When he is ready to retire, this amount will have grown to:
FV = $96,180.66[1 + (.1048/12)]12(20) = $775,438.43
So, when he is ready to retire, based on his current savings, he will be short:
$2,602,465.76 775,438.43 = $1,827,027.33
This amount is the FV of the monthly savings he must make between years 10 and 30. So, finding
the annuity payment using the FVA equation, we find his monthly savings will need to be:
FVA = $1,827,027.33 = C[{[ 1 + (.1048/12)]12(20) 1} / (.1048/12)]
C = $2,259.65
58. To answer this question, we should find the PV of both options, and compare them. Since we are
purchasing the car, the lowest PV is the best option. The PV of the leasing is simply the PV of the
lease payments, plus the $1. The interest rate we would use for the leasing option is the same as the
interest rate of the loan. The PV of leasing is:
PV = $1 + $380{1 [1 / (1 + .08/12)12(3)]} / (.08/12) = $12,127.49
The PV of purchasing the car is the current price of the car minus the PV of the resale price. The PV
of the resale price is:
PV = $15,000 / [1 + (.08/12)]12(3) = $11,808.82
The PV of the decision to purchase is:
$28,000 11,808.82 = $16,191.18
In this case, it is cheaper to lease the car than buy it since the PV of the leasing cash flows is lower.
To find the breakeven resale price, we need to find the resale price that makes the PV of the two
options the same. In other words, the PV of the decision to buy should be:
$28,000 PV of resale price = $12,127.49
PV of resale price = $15,872.51
The resale price that would make the PV of the lease versus buy decision is the FV of this value, so:
Breakeven resale price = $15,872.51[1 + (.08/12)]12(3) = $20,161.86
CHAPTER 6 B-87
59. To find the quarterly salary for the player, we first need to find the PV of the current contract. The
cash flows for the contract are annual, and we are given a daily interest rate. We need to find the
EAR so the interest compounding is the same as the timing of the cash flows. The EAR is:
EAR = [1 + (.055/365)]365 1 = 5.65%
The PV of the current contract offer is the sum of the PV of the cash flows. So, the PV is:
PV = $8,000,000 + $4,000,000/1.0565 + $4,800,000/1.05652 + $5,700,000/1.05653
+ $6,400,000/1.05654 + $7,000,000/1.05655 + $7,500,000/1.05656
PV = $36,764,432.45
The player wants the contract increased in value by $750,000, so the PV of the new contract will be:
PV = $36,764,432.45 + 750,000 = $37,514,432.45
The player has also requested a signing bonus payable today in the amount of $9 million. We can
simply subtract this amount from the PV of the new contract. The remaining amount will be the PV
of the future quarterly paychecks.
$37,514,432.45 9,000,000 = $28,514,432.45
To find the quarterly payments, first realize that the interest rate we need is the effective quarterly
rate. Using the daily interest rate, we can find the quarterly interest rate using the EAR equation,
with the number of days being 91.25, the number of days in a quarter (365 / 4). The effective
quarterly rate is:
Effective quarterly rate = [1 + (.055/365)]91.25 1 = .01384 or 1.384%
Now we have the interest rate, the length of the annuity, and the PV. Using the PVA equation and
solving for the payment, we get:
PVA = $28,514,432.45 = C{[1 (1/1.01384)24] / .01384}
C = $1,404,517.39
60. To find the APR and EAR, we need to use the actual cash flows of the loan. In other words, the
interest rate quoted in the problem is only relevant to determine the total interest under the terms
given. The cash flows of the loan are the $20,000 you must repay in one year, and the $17,200 you
borrow today. The interest rate of the loan is:
$20,000 = $17,200(1 + r)
r = ($20,000 17,200) 1 = .1628 or 16.28%
Because of the discount, you only get the use of $17,200, and the interest you pay on that amount is
16.28%, not 14%.
B-88 SOLUTIONS
61. Here we have cash flows that would have occurred in the past and cash flows that would occur in the
future. We need to bring both cash flows to today. Before we calculate the value of the cash flows
today, we must adjust the interest rate so we have the effective monthly interest rate. Finding the
APR with monthly compounding and dividing by 12 will give us the effective monthly rate. The
APR with monthly compounding is:
APR = 12[(1.09)1/12 1] = 8.65%
To find the value today of the back pay from two years ago, we will find the FV of the annuity, and
then find the FV of the lump sum. Doing so gives us:
FVA = ($44,000/12) [{[ 1 + (.0865/12)]12 1} / (.0865/12)] = $45,786.76
FV = $45,786.76(1.09) = $49,907.57
Notice we found the FV of the annuity with the effective monthly rate, and then found the FV of the
lump sum with the EAR. Alternatively, we could have found the FV of the lump sum with the
effective monthly rate as long as we used 12 periods. The answer would be the same either way.
Now, we need to find the value today of last years back pay:
FVA = ($46,000/12) [{[ 1 + (.0865/12)]12 1} / (.0865/12)] = $47,867.98
Next, we find the value today of the five years future salary:
PVA = ($49,000/12){[{1 {1 / [1 + (.0865/12)]12(5)}] / (.0865/12)}= $198,332.55
The value today of the jury award is the sum of salaries, plus the compensation for pain and
suffering, and court costs. The award should be for the amount of:
Award = $49,907.57 + 47,867.98 + 198,332.55 + 100,000 + 20,000 = $416,108.10
As the plaintiff, you would prefer a lower interest rate. In this problem, we are calculating both the
PV and FV of annuities. A lower interest rate will decrease the FVA, but increase the PVA. So, by a
lower interest rate, we are lowering the value of the back pay. But, we are also increasing the PV of
the future salary. Since the future salary is larger and has a longer time, this is the more important
cash flow to the plaintiff.
62. Again, to find the interest rate of a loan, we need to look at the cash flows of the loan. Since this loan
is in the form of a lump sum, the amount you will repay is the FV of the principal amount, which
will be:
Loan repayment amount = $10,000(1.09) = $10,900
The amount you will receive today is the principal amount of the loan times one minus the points.
Amount received = $10,000(1 .03) = $9,700
Now, we simply find the interest rate for this PV and FV.
$10,900 = $9,700(1 + r)
r = ($10,900 / $9,700) 1 = .1237 or 12.37%
CHAPTER 6 B-89
63. This is the same question as before, with different values. So:
Loan repayment amount = $10,000(1.12) = $11,200
Amount received = $10,000(1 .02) = $9,800
$11,200 = $9,800(1 + r)
r = ($11,200 / $9,800) 1 = .1429 or 14.29%
The effective rate is not affected by the loan amount since it drops out when solving for r.
64. First we will find the APR and EAR for the loan with the refundable fee. Remember, we need to use
the actual cash flows of the loan to find the interest rate. With the $1,500 application fee, you will
need to borrow $221,500 to have $220,000 after deducting the fee. Solving for the payment under
these circumstances, we get:
PVA = $221,500 = C {[1 1/(1.006)360]/.006} where .006 = .072/12
C = $1,503.52
We can now use this amount in the PVA equation with the original amount we wished to borrow,
$220,000. Solving for r, we find:
PVA = $220,000 = $1,503.52[{1 [1 / (1 + r)]360}/ r]
Solving for r with a spreadsheet, on a financial calculator, or by trial and error, gives:
r = 0.6057% per month
APR = 12(0.6057%) = 7.27%
EAR = (1 + .006057)12 1 = 7.52%
With the nonrefundable fee, the APR of the loan is simply the quoted APR since the fee is not
considered part of the loan. So:
APR = 7.20%
EAR = [1 + (.072/12)]12 1 = 7.44%
65. Be careful of interest rate quotations. The actual interest rate of a loan is determined by the cash
flows. Here, we are told that the PV of the loan is $1,000, and the payments are $40.08 per month for
three years, so the interest rate on the loan is:
PVA = $1,000 = $40.08[ {1 [1 / (1 + r)]36 } / r ]
Solving for r with a spreadsheet, on a financial calculator, or by trial and error, gives:
r = 2.13% per month
B-90 SOLUTIONS
APR = 12(2.13%) = 25.60%
EAR = (1 + .0213)12 1 = 28.83%
Its called add-on interest because the interest amount of the loan is added to the principal amount of
the loan before the loan payments are calculated.
66. Here we are solving a two-step time value of money problem. Each question asks for a different
possible cash flow to fund the same retirement plan. Each savings possibility has the same FV, that
is, the PV of the retirement spending when your friend is ready to retire. The amount needed when
your friend is ready to retire is:
PVA = $90,000{[1 (1/1.08)20] / .08} = $883,633.27
This amount is the same for all three parts of this question.
a. If your friend makes equal annual deposits into the account, this is an annuity with the FVA equal
to the amount needed in retirement. The required savings each year will be:
FVA = $883,633.27 = C[(1.0830 1) / .08]
C = $7,800.21
b. Here we need to find a lump sum savings amount. Using the FV for a lump sum equation, we get:
FV = $883,633.27 = PV(1.08)30
PV = $87,813.12
c. In this problem, we have a lump sum savings in addition to an annual deposit. Since we already
know the value needed at retirement, we can subtract the value of the lump sum savings at
retirement to find out how much your friend is short. Doing so gives us:
FV of trust fund deposit = $25,000(1.08)10 = $53,973.12
So, the amount your friend still needs at retirement is:
FV = $883,633.27 53,973.12 = $829,660.15
Using the FVA equation, and solving for the payment, we get:
$829,660.15 = C[(1.08 30 1) / .08]
C = $7,323.77
This is the total annual contribution, but your friends employer will contribute $1,500 per year,
so your friend must contribute:
Friend's contribution = $7,323.77 1,500 = $5,823.77
CHAPTER 6 B-91
67. We will calculate the number of periods necessary to repay the balance with no fee first. We simply
need to use the PVA equation and solve for the number of payments.
Without fee and annual rate = 18.20%:
PVA = $10,000 = $200{[1 (1/1.0152)t ] / .0152 } where .0152 = .182/12
Solving for t, we get:
1/1.0152t = 1 ($10,000/$200)(.0152)
1/1.0152t = .2417
t = ln (1/.2417) / ln 1.0152
t = 94.35 months
Without fee and annual rate = 8.20%:
PVA = $10,000 = $200{[1 (1/1.006833)t ] / .006833 } where .006833 = .082/12
Solving for t, we get:
1/1.006833t = 1 ($10,000/$200)(.006833)
1/1.006833t = .6583
t = ln (1/.6583) / ln 1.006833
t = 61.39 months
Note that we do not need to calculate the time necessary to repay your current credit card with a fee
since no fee will be incurred. The time to repay the new card with a transfer fee is:
With fee and annual rate = 8.20%:
PVA = $10,200 = $200{ [1 (1/1.006833)t ] / .006833 } where .006833 = .082/12
Solving for t, we get:
1/1.006833t = 1 ($10,200/$200)(.006833)
1/1.006833t = .6515
t = ln (1/.6515) / ln 1.006833
t = 62.92 months
68. We need to find the FV of the premiums to compare with the cash payment promised at age 65. We
have to find the value of the premiums at year 6 first since the interest rate changes at that time. So:
FV1 = $800(1.11)5 = $1,348.05
FV2 = $800(1.11)4 = $1,214.46
FV3 = $900(1.11)3 = $1,230.87
B-92 SOLUTIONS
FV4 = $900(1.11)2 = $1,108.89
FV5 = $1,000(1.11)1 = $1,110.00
Value at year six = $1,348.05 + 1,214.46 + 1,230.87 + 1,108.89 + 1,110.00 + 1,000 = $7,012.26
Finding the FV of this lump sum at the childs 65th birthday:
FV = $7,012.26(1.07)59 = $379,752.76
The policy is not worth buying; the future value of the deposits is $379,752.76, but the policy
contract will pay off $350,000. The premiums are worth $29,752.76 more than the policy payoff.
Note, we could also compare the PV of the two cash flows. The PV of the premiums is:
PV = $800/1.11 + $800/1.112 + $900/1.113 + $900/1.114 + $1,000/1.115 + $1,000/1.116 = $3,749.04
And the value today of the $350,000 at age 65 is:
PV = $350,000/1.0759 = $6,462.87
PV = $6,462.87/1.116 = $3,455.31
The premiums still have the higher cash flow. At time zero, the difference is $2,148.25. Whenever
you are comparing two or more cash flow streams, the cash flow with the highest value at one time
will have the highest value at any other time.
Here is a question for you: Suppose you invest $293.73, the difference in the cash flows at time zero,
for six years at an 11 percent interest rate, and then for 59 years at a seven percent interest rate. How
much will it be worth? Without doing calculations, you know it will be worth $29,752.76, the
difference in the cash flows at time 65!
69. The monthly payments with a balloon payment loan are calculated assuming a longer amortization
schedule, in this case, 30 years. The payments based on a 30-year repayment schedule would be:
PVA = $450,000 = C({1 [1 / (1 + .085/12)]360} / (.085/12))
C = $3,460.11
Now, at time = 8, we need to find the PV of the payments which have not been made. The balloon
payment will be:
PVA = $3,460.11({1 [1 / (1 + .085/12)]12(22)} / (.085/12))
PVA = $412,701.01
70. Here we need to find the interest rate that makes the PVA, the college costs, equal to the FVA, the
savings. The PV of the college costs are:
PVA = $15,000[{1 [1 / (1 + r)4]} / r ]
CHAPTER 6 B-93
And the FV of the savings is:
FVA = $5,000{[(1 + r)6 1 ] / r }
Setting these two equations equal to each other, we get:
$15,000[{1 [1 / (1 + r)]4 } / r ] = $5,000{[ (1 + r)6 1 ] / r }
Reducing the equation gives us:
(1 + r)6 4.00(1 + r)4 + 30.00 = 0
Now we need to find the roots of this equation. We can solve using trial and error, a root-solving
calculator routine, or a spreadsheet. Using a spreadsheet, we find:
r = 14.52%
71. Here we need to find the interest rate that makes us indifferent between an annuity and a perpetuity.
To solve this problem, we need to find the PV of the two options and set them equal to each other.
The PV of the perpetuity is:
PV = $15,000 / r
And the PV of the annuity is:
PVA = $20,000[{1 [1 / (1 + r)]10 } / r ]
Setting them equal and solving for r, we get:
$15,000 / r = $20,000[ {1 [1 / (1 + r)]10 } / r ]
$15,000 / $20,000 = 1 [1 / (1 + r)]10
.251/10 = 1 / (1 + r)
r = .1487 or 14.87%
72. The cash flows in this problem occur every two years, so we need to find the effective two year rate.
One way to find the effective two year rate is to use an equation similar to the EAR, except use the
number of days in two years as the exponent. (We use the number of days in two years since it is
daily compounding; if monthly compounding was assumed, we would use the number of months in
two years.) So, the effective two-year interest rate is:
Effective 2-year rate = [1 + (.11/365)]365(2) 1 = .2460 or 24.60%
We can use this interest rate to find the PV of the perpetuity. Doing so, we find:
PV = $7,500 /.2460 = $30,483.41
B-94 SOLUTIONS
This is an important point: Remember that the PV equation for a perpetuity (and an ordinary
annuity) tells you the PV one period before the first cash flow. In this problem, since the cash flows
are two years apart, we have found the value of the perpetuity one period (two years) before the first
payment, which is one year ago. We need to compound this value for one year to find the value
today. The value of the cash flows today is:
PV = $30,483.41(1 + .11/365)365 = $34,027.40
The second part of the question assumes the perpetuity cash flows begin in four years. In this case,
when we use the PV of a perpetuity equation, we find the value of the perpetuity two years from
today. So, the value of these cash flows today is:
PV = $30,483.41 / (1 + .11/365)2(365) = $24,464.32
73. To solve for the PVA due:
C
C
C
+
+ .... +
2
(1 + r ) (1 + r )
(1 + r ) t
C
C
PVAdue = C +
+ .... +
(1 + r )
(1 + r ) t - 1
PVA =
C
C
C
PVAdue = (1 + r )
(1 + r ) + (1 + r ) 2 + .... + (1 + r ) t
PVAdue = (1 + r) PVA
And the FVA due is:
FVA = C + C(1 + r) + C(1 + r)2 + . + C(1 + r)t 1
FVAdue = C(1 + r) + C(1 + r)2 + . + C(1 + r)t
FVAdue = (1 + r)[C + C(1 + r) + . + C(1 + r)t 1]
FVAdue = (1 + r)FVA
74. We need to find the first payment into the retirement account. The present value of the desired
amount at retirement is:
PV = FV/(1 + r)t
PV = $1,000,000/(1 + .10)30
PV = $57,308.55
This is the value today. Since the savings are in the form of a growing annuity, we can use the
growing annuity equation and solve for the payment. Doing so, we get:
PV = C {[1 ((1 + g)/(1 + r))t ] / (r g)}
$57,308.55 = C{[1 ((1 + .03)/(1 + .10))30 ] / (.10 .03)}
C = $4,659.79
CHAPTER 6 B-95
This is the amount you need to save next year. So, the percentage of your salary is:
Percentage of salary = $4,659.79/$55,000
Percentage of salary = .0847 or 8.47%
Note that this is the percentage of your salary you must save each year. Since your salary is
increasing at 3 percent, and the savings are increasing at 3 percent, the percentage of salary will
remain constant.
75. a. The APR is the interest rate per week times 52 weeks in a year, so:
APR = 52(8%) = 416%
EAR = (1 + .08)52 1 = 53.7060 or 5,370.60%
b. In a discount loan, the amount you receive is lowered by the discount, and you repay the full
principal. With an 8 percent discount, you would receive $9.20 for every $10 in principal, so the
weekly interest rate would be:
$10 = $9.20(1 + r)
r = ($10 / $9.20) 1 = .0870 or 8.70%
Note the dollar amount we use is irrelevant. In other words, we could use $0.92 and $1, $92 and
$100, or any other combination and we would get the same interest rate. Now we can find the
APR and the EAR:
APR = 52(8.70%) = 452.17%
EAR = (1 + .0870)52 1 = 75.3894 or 7,538.94%
c. Using the cash flows from the loan, we have the PVA and the annuity payments and need to find
the interest rate, so:
PVA = $68.92 = $25[{1 [1 / (1 + r)]4}/ r ]
Using a spreadsheet, trial and error, or a financial calculator, we find:
r = 16.75% per week
APR = 52(16.75%) = 871.00%
EAR = 1.167552 1 = 3142.1572 or 314,215.72%
B-96 SOLUTIONS
76. To answer this, we need to diagram the perpetuity cash flows, which are: (Note, the subscripts are
only to differentiate when the cash flows begin. The cash flows are all the same amount.)
C1
C2
C1
..
C3
C2
C1
Thus, each of the increased cash flows is a perpetuity in itself. So, we can write the cash flows
stream as:
C1/R
C2/R
C3/R
C4/R
.
So, we can write the cash flows as the present value of a perpetuity, and a perpetuity of:
C2/R
C3/R
C4/R
.
The present value of this perpetuity is:
PV = (C/R) / R = C/R2
So, the present value equation of a perpetuity that increases by C each period is:
PV = C/R + C/R2
77. We are only concerned with the time it takes money to double, so the dollar amounts are irrelevant.
So, we can write the future value of a lump sum as:
FV = PV(1 + R)t
$2 = $1(1 + R)t
Solving for t, we find:
ln(2) = t[ln(1 + R)]
t = ln(2) / ln(1 + R)
Since R is expressed as a percentage in this case, we can write the expression as:
t = ln(2) / ln(1 + R/100)
CHAPTER 6 B-97
To simplify the equation, we can make use of a Taylor Series expansion:
ln(1 + R) = R R2/2 + R3/3 ...
Since R is small, we can truncate the series after the first term:
ln(1 + R) = R
Combine this with the solution for the doubling expression:
t = ln(2) / (R/100)
t = 100ln(2) / R
t = 69.3147 / R
This is the exact (approximate) expression, Since 69.3147 is not easily divisible, and we are only
concerned with an approximation, 72 is substituted.
78. We are only concerned with the time it takes money to double, so the dollar amounts are irrelevant.
So, we can write the future value of a lump sum with continuously compounded interest as:
$1 = $2eRt
2 = eRt
Rt = ln(2)
Rt = .693147
t = .691347 / R
Since we are using interest rates while the equation uses decimal form, to make the equation correct
with percentages, we can multiply by 100:
t = 69.1347 / R
B-98 SOLUTIONS
Calculator Solutions
1.
CFo
C01
F01
C02
F02
C03
F03
C04
F04
I = 10
NPV CPT
$3,093.57
2.
Enter
$0
$1,100
1
$720
1
$940
1
$1,160
1
CFo
C01
F01
C02
F02
C03
F03
C04
F04
I = 18
NPV CPT
$2,619.72
5
N
5%
I/Y
8
N
22%
I/Y
5
N
22%
I/Y
3
N
8%
I/Y
$700
PV
PMT
FV
$881.80
2
N
8%
I/Y
$950
PV
PMT
FV
$1,108.08
1
N
8%
I/Y
$1,200
PV
PMT
FV
$1,296.00
Solve for
Enter
Solve for
3.
Enter
PV
$45,242.49
PV
$38,965.29
PV
$25,334.87
PV
$25,772.76
$7,000
PMT
FV
$9,000
PMT
FV
$7,000
PMT
FV
$9,000
PMT
FV
Solve for
Enter
Solve for
Enter
$0
$1,100
1
$720
1
$940
1
$1,160
1
5%
I/Y
Solve for
Enter
CFo
C01
F01
C02
F02
C03
F03
C04
F04
I = 24
NPV CPT
$2,339.03
8
N
Solve for
Enter
$0
$1,100
1
$720
1
$940
1
$1,160
1
Solve for
FV = $881.80 + 1,108.08 + 1,296 + 1,300 = $4,585.88
CHAPTER 6 B-99
Enter
3
N
11%
I/Y
$700
PV
PMT
FV
$957.34
2
N
11%
I/Y
$950
PV
PMT
FV
$1,170.50
1
N
11%
I/Y
$1,200
PV
PMT
FV
$1,332.00
Solve for
Enter
Solve for
Enter
Solve for
FV = $957.34 + 1,170.50 + 1,332 + 1,300 = $4,759.84
Enter
3
N
24%
I/Y
$700
PV
PMT
FV
$1,334.64
2
N
24%
I/Y
$950
PV
PMT
FV
$1,460.72
1
N
24%
I/Y
$1,200
PV
PMT
FV
$1,488.00
Solve for
Enter
Solve for
Enter
Solve for
FV = $1,334.64 + 1,460.72 + 1,488 + 1,300 = $5,583.36
4.
Enter
15
N
8%
I/Y
40
N
8%
I/Y
75
N
8%
I/Y
Solve for
Enter
Solve for
Enter
Solve for
PV
$39,373.60
PV
$54,853.22
PV
$57,320.99
$4,600
PMT
FV
$4,600
PMT
FV
$4,600
PMT
FV
B-100 SOLUTIONS
5.
Enter
15
N
8.25%
I/Y
$28,000
PV
8
N
8.5%
I/Y
20
N
10.5%
I/Y
PV
$3,000
PMT
40
N
10.5%
I/Y
PV
$3,000
PMT
10
N
6.5%
I/Y
PV
7
N
8%
I/Y
$30,000
PV
Solve for
6.
Enter
Solve for
7.
Enter
PV
$366,546.89
PMT
$3,321.33
$65,000
PMT
Solve for
Enter
Solve for
8.
Enter
Solve for
9.
Enter
Solve for
12.
Enter
7%
NOM
Solve for
Enter
18%
NOM
Solve for
Enter
10%
NOM
Solve for
13.
Enter
Solve for
NOM
11.85%
EFF
7.19%
EFF
19.56%
EFF
10.52%
12.2%
EFF
4
C/Y
12
C/Y
365
C/Y
2
C/Y
PMT
$5,928.38
PMT
$5,762.17
FV
FV
FV
$181,892.42
FV
$1,521,754.74
$80,000
FV
FV
CHAPTER 6 B-101
Enter
Solve for
NOM
9.02%
Enter
Solve for
14.
Enter
NOM
8.26%
13.1%
NOM
Solve for
Enter
13.4%
NOM
Solve for
15.
Enter
Solve for
16.
Enter
9.4%
EFF
12
C/Y
8.6%
EFF
52
C/Y
EFF
13.92%
EFF
13.85%
12
C/Y
2
C/Y
14%
EFF
365
C/Y
20 2
N
9.6%/2
I/Y
$1,400
PV
PMT
FV
$9,132.28
5 365
N
8.4% / 365
I/Y
$6,000
PV
PMT
FV
$9,131.33
10 365
N
8.4% / 365
I/Y
$6,000
PV
PMT
FV
$13,896.86
20 365
N
8.4% / 365
I/Y
$6,000
PV
PMT
FV
$32,187.11
6 365
N
11% / 365
I/Y
NOM
13.11%
Solve for
17.
Enter
Solve for
Enter
Solve for
Enter
Solve for
18.
Enter
Solve for
PV
$23,260.62
PMT
$45,000
FV
B-102 SOLUTIONS
19.
Enter
300%
NOM
Solve for
20.
Enter
60
N
EFF
1,355.19%
7.4% / 12
I/Y
12
C/Y
$61,800
PV
Solve for
Enter
7.4%
NOM
Solve for
21.
Enter
Solve for
22.
Enter
N
79.62
1,733.33%
NOM
Solve for
23.
Enter
22.86%
NOM
Solve for
24.
Enter
30 12
N
EFF
7.66%
0.9%
I/Y
EFF
313,916,515.69%
EFF
25.41%
10% / 12
I/Y
PMT
$1,235.41
12
C/Y
$17,000
PV
$300
PMT
10.00%
NOM
Solve for
Enter
EFF
10.47%
30
N
10.47%
I/Y
12
C/Y
PV
$250
PMT
44
N
0.75%
I/Y
Solve for
FV
$565,121.98
12
C/Y
PV
$3,000
PMT
Solve for
26.
Enter
FV
52
C/Y
Solve for
25.
Enter
FV
PV
$22,536.47
$1,500
PMT
FV
$539,686.21
FV
CHAPTER 6 B-103
27.
Enter
11.00%
NOM
EFF
11.46%
Solve for
CFo
C01
F01
C02
F02
C03
F03
C04
F04
I = 11.46%
NPV CPT
$2,230.20
$0
$900
1
$850
1
$0
1
$1,140
1
CFo
C01
F01
C02
F02
C03
F03
C04
F04
I = 8.45%
NPV CPT
$8,374.62
4
C/Y
$0
$2,800
1
$0
1
$5,600
1
$1,940
1
28.
30.
Enter
NOM
Solve for
17.26%
17.26% / 2 = 8.63%
Enter
NOM
Solve for
16.90%
16.90% / 4 = 4.22%
Enter
NOM
Solve for
16.67%
16.67% / 12 = 1.39%
18%
EFF
2
C/Y
18%
EFF
4
C/Y
18%
EFF
12
C/Y
B-104 SOLUTIONS
31.
Enter
6
N
2.50% / 12
I/Y
$5,000
PV
PMT
FV
$5,062.83
6
N
17% / 12
I/Y
$5,062.83
PV
PMT
FV
$5,508.70
12% / 12
I/Y
PV
$600
PMT
7% / 12
I/Y
PV
$300
PMT
Solve for
Enter
Solve for
$5,508.70 5,000 = $508.70
32.
Stock account:
Enter
360
N
Solve for
FV
$2,096,978.48
Bond account:
Enter
360
N
Solve for
FV
$365,991.30
Savings at retirement = $2,096,978.48 + 365,991.30 = $2,462,969.78
Enter
300
N
9% / 12
I/Y
$2,462,969.78
PV
12
N
1.08%
I/Y
24
N
PMT
$20,669.15
FV
$1
PV
PMT
FV
$1.14
1.08%
I/Y
$1
PV
PMT
FV
$1.29
480
N
11% / 12
I/Y
PV
PMT
$116.28
360
N
11% / 12
I/Y
PV
PMT
$356.57
Solve for
33.
Enter
Solve for
Enter
Solve for
34.
Enter
Solve for
Enter
Solve for
$1,000,000
FV
$1,000,000
FV
CHAPTER 6 B-105
Enter
240
N
11% / 12
I/Y
PV
Solve for
35.
Enter
12 / 3
N
Solve for
36.
Enter
10.00%
NOM
Solve for
Enter
2
N
I/Y
41.42%
EFF
10.47%
10.47%
I/Y
Solve for
$1
PV
PMT
$1,155.22
$1,000,000
FV
PMT
$4
FV
$90,000
PMT
FV
$7,000
PMT
FV
$7,000
PMT
FV
$7,000
PMT
FV
$225
PMT
$20,000
FV
12
C/Y
PV
$155,215.98
CFo
$45,000
$65,000
C01
2
F01
I = 10.47%
NPV CPT
$157,100.43
39.
Enter
10
N
10%
I/Y
10
N
5%
I/Y
10
N
15%
I/Y
Solve for
Enter
Solve for
Enter
Solve for
40.
Enter
Solve for
N
68.37
9% / 12
I/Y
PV
$43,011.97
PV
$54,052.14
PV
$35,131.38
PV
B-106 SOLUTIONS
41.
Enter
60
N
Solve for
0.682% 12 = 8.18%
42.
Enter
360
N
I/Y
0.682%
6.8% / 12
I/Y
Solve for
$220,000 168,731.02 = $51,268.98
Enter
360
N
6.8% / 12
I/Y
$55,000
PV
PV
$168,731.02
$51,268.98
PV
$1,120
PMT
FV
$1,100
PMT
FV
PMT
FV
$392,025.82
PMT
FV
$2,940.02
Solve for
43.
CFo
C01
F01
C02
F02
C03
F03
C04
F04
I = 10%
NPV CPT
$4,355.24
$0
$1,500
1
$0
1
$1,800
1
$2,400
1
PV of missing CF = $6,785 4,355.24 = $2,429.76
Value of missing CF:
Enter
Solve for
2
N
10%
I/Y
$2,429.76
PV
CHAPTER 6 B-107
44.
CFo
$1,000,000
$1,400,000
C01
1
F01
$1,800,000
C02
1
F02
$2,200,000
C03
1
F03
$2,600,000
C04
1
F04
$3,000,000
C05
1
F05
$3,400,000
C06
1
F06
$3,800,000
C07
1
F07
$4,200,000
C08
1
F08
$4,600,000
C09
1
F09
$5,000,000
C010
I = 9%
NPV CPT
$19,733,830.26
45.
Enter
360
N
Solve for
I/Y
0.598%
.80($2,400,000)
PV
$13,000
PMT
FV
PMT
$145,000
FV
PMT
$145,000
FV
APR = 0.598% 12 = 7.17%
Enter
7.17%
NOM
Solve for
46.
Enter
3
N
EFF
7.42%
13%
I/Y
Solve for
12
C/Y
PV
$100,492.27
Profit = $100,492.27 94,000 = $6,492.27
Enter
Solve for
3
N
I/Y
15.54%
$94,000
PV
B-108 SOLUTIONS
47.
Enter
17
N
10%
I/Y
8
N
10%
I/Y
84
N
13% / 12
I/Y
96
N
10% / 12
I/Y
84
N
13% / 12
I/Y
Solve for
Enter
PV
$16,043.11
PV
$7,484.23
Solve for
48.
Enter
Solve for
Enter
Solve for
Enter
Solve for
PV
$82,453.99
PV
$98,852.23
PV
$39,985.62
$2,000
PMT
FV
PMT
$16,043.11
FV
$1,500
PMT
FV
$1,500
PMT
FV
PMT
$98,852.23
FV
$82,453.99 + 39,985.62 = $122,439.62
49.
Enter
15 12
N
9.5%/12
I/Y
PV
$1,000
PMT
Solve for
FV
$395,984.63
FV = $395,984.63 = PV e.09(15); PV = $395,984.63e1.35 = $102,645.83
50.
PV@ t = 14: $5,000 / 0.057 = $87,719.30
Enter
7
N
5.7%
I/Y
Solve for
51.
Enter
12
N
Solve for
I/Y
2.219%
PV
$59,507.30
PMT
$87,719.30
FV
$20,000
PV
$1,916.67
PMT
FV
APR = 2.219% 12 = 26.62%
Enter
Solve for
26.62%
NOM
EFF
30.12%
12
C/Y
CHAPTER 6 B-109
52.
Monthly rate = .10 / 12 = .0083; semiannual rate = (1.0083)6 1 = 5.11%
Enter
10
N
5.11%
I/Y
8
N
5.11%
I/Y
12
N
5.11%
I/Y
18
N
5.11%
I/Y
8
N
9.5%
I/Y
Solve for
Enter
Solve for
Enter
Solve for
Enter
Solve for
53.
a.
Enter
Solve for
b.
FV
PV
$30,949.21
PMT
$46,094.33
FV
PV
$25,360.08
PMT
$46,094.33
FV
PV
$18,810.58
PMT
$46,094.33
FV
$950
PMT
FV
$950
PMT
FV
PV
$46,094.33
PV
$5,161.76
2nd BGN 2nd SET
Enter
8
N
9.5%
I/Y
Solve for
54.
$6,000
PMT
PV
$5,652.13
2nd BGN 2nd SET
Enter
60
N
8.15% / 12
I/Y
$61,000
PV
11%
EFF
12
C/Y
8%
EFF
12
C/Y
Solve for
57.
Pre-retirement APR:
Enter
Solve for
NOM
10.48%
Post-retirement APR:
Enter
Solve for
NOM
7.72%
PMT
$1,232.87
FV
B-110 SOLUTIONS
At retirement, he needs:
Enter
240
N
7.72% / 12
I/Y
Solve for
PV
$2,602,465.76
$20,000
PMT
$750,000
FV
In 10 years, his savings will be worth:
Enter
120
N
10.48% / 12
I/Y
PV
$2,000
PMT
Solve for
FV
$421,180.66
After purchasing the cabin, he will have: $421,180.66 325,000 = $96,180.66
Each month between years 10 and 30, he needs to save:
Enter
240
N
10.48% / 12
I/Y
$96,180.66
PV
Solve for
PV of purchase:
36
8% / 12
N
I/Y
Solve for
$28,000 11,808.82 = $16,191.18
PMT
$2,259.65
58.
Enter
PV of lease:
36
8% / 12
N
I/Y
Solve for
$12,126.49 + 1 = $12,127.49
Lease the car.
PV
$11,808.82
Enter
PV
$12,126.49
$2,602,465.76
FV
PMT
$15,000
FV
$380
PMT
FV
You would be indifferent when the PV of the two cash flows are equal. The present value of the
purchase decision must be $12,127.49. Since the difference in the two cash flows is $28,000
12,127.49 = $15,872.51, this must be the present value of the future resale price of the car. The
break-even resale price of the car is:
Enter
36
N
8% / 12
I/Y
$15,872.51
PV
Solve for
59.
Enter
Solve for
5.50%
NOM
EFF
5.65%
365
C/Y
PMT
FV
$20,161.86
CHAPTER 6 B-111
CFo
$8,000,000
$4,000,000
C01
1
F01
$4,800,000
C02
1
F02
$5,700,000
C03
1
F03
$6,400,000
C04
1
F04
$7,000,000
C05
1
F05
$7,500,000
C06
1
F06
I = 5.65%
NPV CPT
$36,764,432.45
New contract value = $36,764,432.45 + 750,000 = $37,514,432.45
PV of payments = $37,514,432.45 9,000,000 = $28,514,432.45
Effective quarterly rate = [1 + (.055/365)]91.25 1 = .01384 or 1.384%
Enter
24
N
1.384%
I/Y
$28,514,432.45
PV
Solve for
60.
Enter
1
N
Solve for
61.
Enter
Solve for
Enter
I/Y
16.28%
$17,200
PV
PMT
$1,404,517.39
PMT
9%
EFF
8.65% / 12
I/Y
PV
$44,000 / 12
PMT
1
N
9%
I/Y
$45,786.76
PV
PMT
NOM
8.65%
Solve for
Enter
Solve for
$20,000
FV
12
C/Y
12
N
FV
FV
$45,786.76
FV
$49,907.57
B-112 SOLUTIONS
Enter
12
N
8.65% / 12
I/Y
60
N
8.65% / 12
I/Y
PV
$46,000 / 12
PMT
Solve for
Enter
Solve for
PV
$198,332.55
$49,000 / 12
PMT
FV
$47,867.98
FV
Award = $49,907.57 + 47,867.98 + 198,332.55 + 100,000 + 20,000 = $416,108.10
62.
Enter
1
N
Solve for
63.
Enter
1
N
Solve for
I/Y
12.37%
I/Y
14.29%
$9,700
PV
PMT
$10,900
FV
$9,800
PV
PMT
$11,200
FV
64. Refundable fee: With the $1,500 application fee, you will need to borrow $221,500 to have
$220,000 after deducting the fee. Solve for the payment under these circumstances.
30 12
N
Enter
7.20% / 12
I/Y
$221,500
PV
Solve for
30 12
N
Enter
I/Y
Solve for
0.6057%
APR = 0.6057% 12 = 7.27%
Enter
7.27%
NOM
Solve for
EFF
7.52%
$220,000
PV
12
C/Y
Without refundable fee: APR = 7.20%
Enter
Solve for
7.20%
NOM
EFF
7.44%
12
C/Y
PMT
$1,503.52
$1,503.52
PMT
FV
FV
CHAPTER 6 B-113
65.
Enter
36
N
Solve for
$1,000
PV
I/Y
2.13%
$40.08
PMT
FV
$90,000
PMT
FV
APR = 2.13% 12 = 25.60%
Enter
25.60%
NOM
Solve for
66.
12
C/Y
EFF
28.83%
What she needs at age 65:
Enter
20
N
8%
I/Y
30
N
8%
I/Y
30
N
8%
I/Y
10
N
8%
I/Y
Solve for
a.
Enter
PV
$883,633.27
PV
Solve for
b.
Enter
Solve for
c.
Enter
PV
$87,813.12
$25,000
PV
PMT
$7,800.21
PMT
PMT
Solve for
$883,633.27
FV
$883,633.27
FV
FV
$53,973.12
At 65, she is short: $883,633.27 53,973.12 = $829,660.15
Enter
30
N
8%
I/Y
PV
Solve for
PMT
$7,323.77
$829,660.15
FV
Her employer will contribute $1,500 per year, so she must contribute:
$7,323.77 1,500 = $5,823.77 per year
67.
Without fee:
Enter
Solve for
N
94.35
18.2% / 12
I/Y
$10,000
PV
$200
PMT
FV
B-114 SOLUTIONS
8.2% / 12
I/Y
$10,000
PV
$200
PMT
FV
8.2% / 12
I/Y
$10,200
PV
$200
PMT
FV
5
N
11%
I/Y
$800
PV
PMT
FV
$1,348.05
4
N
11%
I/Y
$800
PV
PMT
FV
$1,214.46
3
N
11%
I/Y
$900
PV
PMT
FV
$1,230.87
2
N
11%
I/Y
$900
PV
PMT
FV
$1,108.89
1
N
11%
I/Y
$1,000
PV
PMT
FV
$1,110
Enter
Solve for
N
61.39
With fee:
Enter
Solve for
68.
N
62.92
Value at Year 6:
Enter
Solve for
Enter
Solve for
Enter
Solve for
Enter
Solve for
Enter
Solve for
So, at Year 5, the value is: $1,348.05 + 1,214.46 + 1,230.87 + 1,108.89 + 1,100
+ 1,000 = $7,012.26
At Year 65, the value is:
Enter
59
N
7%
I/Y
$7,012.26
PV
PMT
FV
Solve for
$379,752.76
The policy is not worth buying; the future value of the deposits is $379,752.76 but the policy
contract will pay off $350,000.
CHAPTER 6 B-115
69.
Enter
30 12
N
8.5% / 12
I/Y
22 12
N
8.5% / 12
I/Y
$450,000
PV
Solve for
Enter
Solve for
70.
CFo
C01
F01
C02
F02
IRR CPT
14.52%
75.
a.
PV
$412,701.01
PMT
$3,460.11
FV
$3,460.11
PMT
FV
PMT
$10.00
FV
$25
PMT
FV
$5,000
$5,000
5
$15,000
4
APR = 8% 52 = 416%
Enter
416%
NOM
Solve for
b.
Enter
1
N
Solve for
EFF
5,370.60%
I/Y
8.70%
52
C/Y
$9.20
PV
APR = 8.70% 52 = 452.17%
Enter
452.17%
NOM
Solve for
c.
Enter
4
N
Solve for
EFF
7,538.94%
I/Y
16.75%
52
C/Y
$68.92
PV
APR = 16.75% 52 = 871.00%
Enter
Solve for
871.00%
NOM
EFF
314,215.72%
52
C/Y