Week 2 Ch. 2 solutions

# Week 2 Ch. 2 solutions - option III is the best alternative...

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Week 2 Solutions Chapter 2 2. (a) PMT \$ 1,000 (ordinary annuity) I/Y 8 N 18 FV \$ 37,450 (b) FV \$ 37,450 I/Y 8 N 18 PV \$ 9,372 Same answer for PVA of 1000 for 18 years at 8%. 3. (a) i) At 6% I: \$ 1000.00 II: PVA of 400 (3 yrs, 6%) = \$ 1069.20 III: PV of [500 (1 yr) + 400 (2 yr) + 300 (3yr)] at 6% = \$ 1079.58 Therefore at 6% the ideal choice is option III. ii) At 10% I: PV = \$ 1000.00 II: PVA of 400 (3 yrs, 10%) = \$ 994.74 III: PV of [500 (1 yr) + 400 (2 yr) + 300 (3yr)] at 10% = \$ 1010.52 Therefore at 10% the ideal choice is option III . iii) At 12% I: PV = \$ 1000.00 II: PVA of 400 (3 yrs, 12%) = \$ 960.73 III: PV of [500 (1 yr) + 400 (2 yr) + 300 (3yr)] at 12% = \$ 978.84 Therefore at 12% the ideal choice is option I . In general, as interest rates rise, you want to receive more of your money earlier. (b) I: PV = \$ 1000.00 II: PV of 400 [(1 yr, 6%) + (2 yr, 6.5%) + (3yr, 7%)] = \$ 1056.54 III: PV of 500(1 yr, 6%) + 400(2 yr, 6.5%) + 300(3yr, 7%)] = \$1069.25 Given the above rates,

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Unformatted text preview: option III is the best alternative. Using FV instead of PV, which many students will do for part (b), you get I = 1225.04, II = 1277.69, III = 1291.11. 11. (a) PV 525,000 N 10 FV-1,000,000 I/Y 6.66% Therefore, he must save more. (b) PV-525,000 FV 1,000,000 N 10 I/Y 6 PMT 4,537 (c) Set calculator to annuity due worksheet. For BAII Plus 2 nd BGN END appears 2 nd SET BGN appears 2 nd QUIT back to operation, but now says BGN for annuity due. PV-525,000 N 10 I/Y 6 FV 1,000,000 PMT 4,280 (d) \$ 1,000,000 = FV \$525,000 (12%, 10 yr) + FVA (ord) of PMT (12%, 10 yr) PMT = -\$35,933 Or PV-525,000 N 10 I/Y 12 FV 1,000,000 PMT-35,933 That is, he could withdraw \$35,933 p.a. and still have \$1 million at the end of 10 years because of the higher rate of return. In this case he could actually withdraw \$ 35,933 p.a. for the next 10 years and still achieve his \$1,000.000 goal at retirement....
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## This note was uploaded on 10/14/2011 for the course ADMS 3541 taught by Professor Staff during the Winter '10 term at York University.

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Week 2 Ch. 2 solutions - option III is the best alternative...

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