more_TVM_answers - Finance 254 Yet Another Set of Time...

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Finance 254 Yet Another Set of Time Value of Money Answers Problem 1: This problem requires three steps: (1) finding the present value of an annuity, (2) finding the value of an annuity that does not begin until sometime in the future, and importantly (3) discounting the value from (2) back to the present. Step One : Find the present value of the \$12,000 annuity PMT = \$12,000 N = 5 I = 12% FV = 0 . . . solving for the present value yields \$43,257.314 Step Two : Find the value of the \$3,000 annuity in year 5 dollars PMT = \$3,000 N = 6 I = 12% FV = 0 . . . solving for the present value yields \$12,334.222. It is very important to remember that this is the present value in year 5 dollars! This must be discounted to year 0 to add to the amount found in step one. Step Three : Discount the value of the \$3,000 annuity to year 0 dollars FV = \$12,334.222 N = 5 I = 12% PMT = 0 . . . solving for the present value yields \$6,998.769 Finally, we add the two sums to obtain the final answer : \$43,257.314 + \$6,998.769 = \$50,256.08 Problem 2: (a) The APR (Annual Percentage Rate) is not a very meaningful number; it does not accurately reflect the interest you will have to pay on the loan. The interest rate that

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This note was uploaded on 09/19/2009 for the course FIN FIN 221 taught by Professor Fin221 during the Fall '09 term at University of Illinois, Urbana Champaign.

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more_TVM_answers - Finance 254 Yet Another Set of Time...

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