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# FI.APP.A - H'EI rr i-il;t'ttsii;ii Solutions SellTest to...

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H'EI' rr i-i l-;t'ttsii ;ii Solutions to SellTest Problems Chapter 2 (sT-r) a o 8"" 1,000 \$1,000 is beint compounded for 3 years, so your balance at Year 4 is 91,259.71: FVN =PV(l + r)\ = \$r,000(t + 0.08)3 \$1,2s9.71. Altematively, using a linancial calculator, input N 3,I/YR 8, PV -1000, PMT 0, and FV ? Solve for FV b.0 12 16 There are 12 compounding periods from Quarter 4 to 16. / r. ^..\Nri F\,-rvl | .:'l r\,_ br.000\r02/:--r2,'r24. \ 1Vt / Alternatively, ushg a financial calculaior, 12, l/YIt 2, PV = -1000, PMT \$1,258.24. 250 fll +0.081{ I I FVA4 \$2501 o,s o'r,8 : \$1,126s3 Using a financial calculator, 4, I/YR {1, 250, and FV \$1,126.53. [(i+0.i18)* ] I rMrl o.os o os i \$1 25o 71 PMT(4.s0an) \$1,259.71 doa% \$279.56. 969

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AppGndix A Sot'.'lions lo Self'Iolt Prcbldms Using a financial calclrlator, input N = 4IIYR = 8, PV : 0, FV : 159.71, and PMT = ? Solve for PMT = -9279.56. l5f-21 a. Set up a time line like the one in lhe pecedint prcblem: 1,000 2 7 t .u=?,0* Here we are dealing with a +year annuity who€e first pa)'mmt occlrls I yeat from today and whose future valu€ must equal \$1,000. Here is the solution: N : a; I/YR - 8; fry = 0; FV = 1000; PMT = ?;PMT = W1.92. Altematively, t/1 +nnar4 1 l py1 ti__I:1 _ _, = \$1,000 L 0.08 0.08l PMT(4.5051) = \$1,tn0 PW = 9221. .92. This prcblem can be appoached in several ways. Perhaps the simpleBt is to ask this question: "ffI received \$7501 year fom now and deposited it to eam 8%, would I have the required \$1,000 4 years from now?" The answer is no: Note that your deposit will gow for 3 years at 8%. The deposit at Year 1 is the PV, and the FV iE \$1,000. Here is the solution: N : 3, VYR : 8, PMT : 0, FV = 1000, PV = ?, PV = \$793.83. Altematively FVN rrv=-=_=s791.83. (1 + I)'' (1 + 0.08)' 0g%1 3 4 -7il FV3 : \$7500.08)0,08)(1.08) \$e44.78. Thia indicateE that you should let your father make the payments rather than accePt lhe lumP sum of \$750. You could a15o compare the \$750 with the PV of the parments: ?21.92 221.92 e1.92 221.V \$735.03. N : 4, I/YR Altemativel, :8,PMI = 221.92;FY o;PY: ?;PY = f1 (0.08x1 + 08r ] strt *.
Solutionr to Self.Telt Prcbllm! This is les8 than the \$750 lump sum offer, so your jnitial reaction miSht be to accept the lump 6um of \$750. However, this would be a nistake. The problem is that wh€n you found the \$735.02 PV of the annuity, you were finding the value of the annuity ,odfiy. You were comparing \$735.02 today with the lump sum of \$750 I year ftom now. This is, ol cours€, invalid. What you should have done was take the \$235.(D, rccognize ftat this is the PV of an amuity as of today, multiply \$735.(D by 1.08 to get \$7%.83, and compare \$793.83 with the lump sum of \$750. You would then tale your father's offer to make tlrc payments rather than take the lump sum 1 year from now. -7& i,@0 N = 3; PV -750; PMT 0; FV 1000; solve for I/YR 10.0642%. 146.29 N = 4; PV = 0; PMT = -1a6.29;F\ = 1000;.olve lotllyR = 19.997%. You might be able to find a borower willing to ofter you a 20% interest rate, but there would be some risk involved-he or she might not actualy pay you your sl,fi)0! f.o8%1234 ltoo 2 ? rv ] r,ooo Find the futur€ value of the original \$400 depositi FVa PV(1 rI)6:400(1 + 0.04)6 \$4000.26s3) \$505.12. Thi6 means that at Year 4 you need an additional sum of \$493.88: \$1,000.00 - \$505.12 5493,88, This will be accumulat€d by making 6 equal payments which earn 8% com- pounded s€miannually or 4% each 6 months: N = 6; li\?

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FI.APP.A - H'EI rr i-il;t'ttsii;ii Solutions SellTest to...

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