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FINC600 Work

# FINC600 Work - Amy Hemphill FIN 534 Homework Chapter 1 1...

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June 12, 2011 Week 1 Chp 2 9. a. The cost of a new automobile is \$10,000. If the interest rate is 5%, how much would you have to set aside now to provide this sum in five years? Answer: r = 5% .05 x \$10,000 = 500 = \$10,500 1 st year: \$10,000 x (1 + .05) = 10,000 x 1.05 = \$10,500 2 nd year: \$10,500 x 1.05 = \$10,000 x 1.05^2 = \$11,025 3 rd year: \$11,025 x 1.05 = \$10,000 x 1.05^3 = \$11,576.25 4 th year: \$11,576.25 x 1.05 = \$10,000 x 1.05^4 = 12,155.06 5 th year: \$12,155.06 x 1.05 = \$10,000 x 1.05^5 = 12,762.82 PV = \$12,762.82/(1.05)^5 = \$10,000 10,000/1.05^5 = \$7,840 b. You have to pay \$12,000 a year in school fees at the end of each of the next six years. If the interest rate is 8%, how much do you need to set aside today to cover these bills? Answer: N= 6 years I/yr = 8% FV= 0 PV= ? 55,474.56 PMT= -12,000 12,000 x 4.623 (6-year annuity factor) = \$55,476 c. You have invested \$60,476 at 8%. After paying the above school fees, how much would remain at the end of six years? Answer: Total investment = \$60,476 Less payments (55,476) Remaining FVA due=5,000 FVA due = \$5,000(1+I)^yr \$5,000(1.08)^6 =\$7934.37

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1.08^6 x (60,476 – 55,476) = \$7,934 11. You are quoted an interest rate of 6% on an investment of \$10 million. What is the value of your investment after four years if interest is compounded?
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FINC600 Work - Amy Hemphill FIN 534 Homework Chapter 1 1...

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