BUS 106.course handouts.Spring 2016 (3)

BUS 106.course handouts.Spring 2016 (3) - BUS 106(ECON 134...

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BUS 106 (ECON 134) Course Handouts Spring 2016 Professor Y. Peter Chung 1

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START-UP PROBLEMS FOR “TIME VALUE OF MONEY” By Y. Peter Chung 1. An investment opportunity promises cash flows of \$400/yr for the next 8 years. What is the maximum price you would be willing to pay today? (You want 10% of return on your investment). 2. You borrow \$5,000 from a bank today to be repaid in 4 equal annual installments. Bank charges 8% annual rate of interest. What annual payment is required? 3. A gold mine is expected to bring \$10,000 a year for the first 10 years, and \$5,000 per year for the 2 nd 10 years. Also it will require \$30,000 outlay to properly close the mine at the end of 20 years. If you want 20% rate of return on this investment, how much money is the present value of the mine? 4. At a growth rate of 8%, how long does it take a sum to double? 5. You need \$129,200 at the end of 17 years. You know that the best you can do is to make equal payments into an account on which you can earn 9% interest compounded annually. Your first payment is to be made at the end of the first year. a) What amount must you plan to pay annually to achieve your goal? b) Instead of making annual payments, you decide to make one lump sum payment today. To achieve your objective of \$129,200 at the end of the 17 year period, what should this sum be? (You can still earn 9% interest compounded annually on your account.) 6. A bank agrees to lend you \$1,000 today in return for your promise to pay back \$2,773 nine years from today. What rate of interest is the bank charging you? 7. On December 31, Peter buys a building for \$80,000, paying 20% down and agreeing to pay the balance in 15 equal annual installments that are to include principal plus 10% compound interest on the declining balance. What are the equal installments? 8. How many years will it take \$500 to grow to \$1,586 if it is invested at 8% compounded annually? 9. At what annual rate would \$1,000 have to be invested in order to grow to \$4,046 in 10 years?
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