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Unformatted text preview: Examples with Solutions 1. Invest $2,000 now at 6%. Compound annually. How much will you have in two years? N=2, Compounding Rate (IR) = 6%, use Table 1 Factor = 1.1236 Future Value = 2,000 * 1.1236 = $2,247 2. Invest $5,000 now at 8%. Compound annually. How much will you have in five years? N=2, IR=8%, use Table 1 => Factor = 1.4693 Future Value = 1.4693 * 5,000 = $7,347 3. Your brother buys your used car and offers you three different payment plans: a. $900 now to settle the debt b. $250 now and $100/qtr for the next 10 qtrs. c. $500 now and $600 in one year. Assume your investment opportunity cost is 8% compounded quarterly. Which option will you select? What if your opportunity cost is 12%? Solution for 8%: Calculate the present value of each alternative: a. PV = $900 b. want to solve for present value of ordinary annuity (Table IV) N=10, IR=8%/4 = 2% => Factor = 8.9826 PV of payment stream = 100 * 8.9826 = $898 PV of Alternative B = 898 + 250 = $1,148 c. want to solve for present value of a single sum (Table II) N=4, IR=2% => Factor = 0.9238 PV of payment due in one year = 600 * 0.9238 = $554 PV of Alternative C = 554 + 500 = $1,054 1 Choice is b. 4. You want to buy a new recordable DVD player. The store gives you three different payment options: a. $600 cash now b. $35/month for 20 months c. $100 down and $40/month for 15 months The interest rate the store charges is 24% and is compounded monthly. Which alternative will you choose? Solution: Calculate the present value of each alternative: a. $600 b. Want PV of ordinary annuity => use Table IV...
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- Spring '05
- Time Value Of Money