PS_2 - c If Mike plans to spend these savings in even...

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FM212 Principles of Finance Class Assignments MT 2010/11 Class 2 (Chapters 3 and 4.5) 6. You have just received a windfall from an investment you made in a friend’s business. He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today). The interest rate is 3.5% per year. a. What is the present value of your windfall? b. What is the future value of your windfall in three years (on the date of the last payment)? 7. Mike Polanski is 30 years of age and his salary next year will be $40,000. Mike forecasts that his salary will increase at the steady rate of 5 percent per annum until his retirement at age 60. a. If the discount rate is 8 percent, what is the PV of these future salary payments? b. If Mike saves 5 percent of his salary each year and invests these savings at an interest rate of 8 percent, how much will he have saved by age 60?
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Unformatted text preview: c. If Mike plans to spend these savings in even amounts over the subsequent 20 years, how much can he spend each year? 8. You have just purchased a home and taken out a $500,000 mortgage. The mortgage has a 30-year term with fixed monthly payments and an APR of 6% (monthly compounding). a. How much will you pay in interest, and how much will you pay in principal, during the first year? b. How much will you pay in interest, and how much will you pay in principal, during the twentieth year (i.e., between 19 and 20 years from now)? 9. Your firm is purchasing a new telephone system, which will last for four years. You can purchase the system for an upfront cost of $150,000, or you can lease the system from the manufacturer for $4,000 paid at the end of each month. Your firm can borrow and lend at an interest rate of 5% APR with semi-annual compounding. Should you purchase the system outright or pay $4,000 per month?...
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This note was uploaded on 12/06/2010 for the course FM FM212 taught by Professor Mungowilson during the Fall '10 term at LSE.

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