Solutions_Ch05

# Solutions_Ch05 - CHAPTER 5 INTRODUCTION TO VALUATION THE...

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CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY 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. The simple interest per year is: \$5,000 × .06 = \$300 So after 10 years you will have: \$300 × 10 = \$3,000 in interest. The total balance will be \$5,000 + 3,000 = \$8,000 With compound interest we use the future value formula: FV = PV(1 + r ) t FV = \$5,000(1.06) 10 = \$8,954.24 The difference is: \$8,954.24 – 8,000 = \$954.24 3. To find the PV of a lump sum, we use: PV = FV / (1 + r) t PV = \$15,451 / (1.04) 6 = \$12,211.15 PV = \$51,557 / (1.11) 7 = \$24,832.86 PV = \$886,073 / (1.20) 23 = \$13,375.22 PV = \$550,164 / (1.13) 18 = \$60,964.94 8. To answer this question, we can use either the FV or the PV formula. Both will give the same answer

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## This note was uploaded on 09/08/2009 for the course FIN 311 taught by Professor Layish during the Spring '08 term at Binghamton.

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Solutions_Ch05 - CHAPTER 5 INTRODUCTION TO VALUATION THE...

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