tvmpracticeset1solutions

tvmpracticeset1solutions - Solutions to TVM Practice Set I...

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Solutions to TVM Practice Set I 1. The future value is $12,000 in four years, so you wish to find the present value, at a discount rate of 4.5% per year. The timeline looks like this: 0 1 2 3 4 PV = ? 12,000 Using the PVIF, compute the PV as follows: t r PVIF ) 1 ( 1 + = . Therefore: 4 ) 045 . 0 1 ( 000 , 12 + = × = PVIF FV PV = $10,062.74 On your financial calculator: N I PV PMT FV 4 4.5 CPT 12,000 -10,062.74 2. For each period, multiply by (1 + r). The timeline looks like this: 0 1 2 3 4 1 + r = 1.04 0.948 1.085 0.95 100 104 98.59 106.97 101.62 Therefore: Ending value = Beginning value × 1.04 × 0.948 × 1.085 × 0.95 = $100 × 1.0162 = $101.62 3. a. You wish to find the annual rate that doubles an amount by the end of four years. The timeline looks like this: 0 1 2 3 4 -100 200 In FVIF terms, you must find r such that: FV = PV × FVIF 200 = 100 × (1 + r ) 4 => r = - 1 ) 100 200 ( 4 1 = .1892 or 18.92% F301 TVM practice set I solutions 1
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On your financial calculator, compute I: N I PV PMT FV 4 CPT -100 200 18.92 b. Find t , the number of periods, such that: 200 = 100 × (1.125) t . On your financial calculator, compute N: N I PV PMT FV CPT 12.5 -100 200 5.88 4. a. The total present value is the sum of the present values of the three payments, discounted at 7% per year. The timeline looks like this: 0 1 2 3 PV = ? 180,000 50,000 70,000 30 . 224 , 168 07 . 1 000 , 180 1 = = PV 94 . 671 , 43 07 . 1 000 , 50 2 2 = = PV 85 . 140 , 57 07 . 1 000 , 70 3 3 = = PV Sum = $269,037.09 b. The three equal payments must have a present value of $269,037.09. Therefore, find PMT such that PV = 269,037.09. Solve for the payment amount, C , in the annuity present value formula: + - × = r r C APV t ) 1 ( 1 1 ; - = ] 07 . ) 07 . 1 ( 1 1 [ 09 . 037 , 269 $ 3 C ; C = $102,517.03 On your financial calculator: N I PV PMT FV 3 7 -269,037.09 CPT 102,517.0 3 F301 TVM practice set I solutions 2
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5. a. The best option is the one with the highest present value. Therefore, you must calculate
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This note was uploaded on 01/13/2011 for the course BUS A202 taught by Professor Tindall during the Spring '10 term at IUPUI.

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tvmpracticeset1solutions - Solutions to TVM Practice Set I...

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