tvmpracticeset2solutions

# 1090 60 r r 1 1 1 23 solve for r on a financial

This preview shows pages 2–4. Sign up to view the full content.

if the present value were \$1090 and there are 23 months of \$60 payments. => \$1090 = \$60 * ] r ) r 1 ( 1 1 [ 23 + - ; solve for r on a financial calculator as follows: N = 23, PV = \$1090, PMT = -\$60; compute I; I = 2.0632% per month, Convert to an E.A.R.: (1.020632) 12 –1 = 27.77% 4. There are several ways to solve this problem. First, you can use brute force and discount all the cash flows back individually ( YUCK!). Alternatively, you can see that there are effectively two annuity streams here; a five period ordinary annuity of \$253 with the first cash flow one period away and then a four period ordinary annuity of \$253 with the first cash flow starting 7 periods from now. Recalling that the annuity present value formula assumes that payments start at the end of the period (i.e., one period away), you can solve the for present value of these cash flows as follows: => PV = \$253 * PVIFA(7.9%,5) + 6 ) 079 . 1 ( ) 4 %, 9 . 7 ( * 253 \$ PVIFA => = \$253 * ] 079 . ) 079 . 1 ( 1 1 [ 5 - + \$253 * ] 079 . ) 079 . 1 ( 1 1 [ 4 - * ] ) 079 . 1 ( 1 [ 6 => = \$1,012.82 + \$532.19 = \$1,545.01 On a financial calculator: Step 1: Determine the present value of the first 5 payments: PMT = \$253, N = 5, I = 7.9; compute PV = \$1,012.82 Step 2: Determine value of the last 4 payments as of t = 6: PMT = \$253, N = 4, I = 7.9; compute PV = \$839.84 This is the value at the end of 6th year, so you must discount it 6 more years. FV = \$839.84, N = 6, I = 7.9; compute PV = \$532.19 Step 3: Add the two values together \$1,012.82 + \$532.19 = \$1,545.01 F301 TVM practice set II solutions 2

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Now, a simpler approach. Calculate the value of a 10-year, \$253 annuity and then subtract off the present value of the missing payment at t = 6. => PV = \$253 * PVIFA(7.9%,10) - \$253 * PVIF(7.9%,6) => \$253 * ] 079 . ) 079 . 1 ( 1 1 [ 10 - - 6 ) 079 . 1 ( 253 \$ => \$1,705.33 - \$160.32 = \$1,545.01 On a financial calculator: Step 1: Determine the present value of a 10 year annuity: PMT = \$253, N = 10, I = 7.9; compute PV = \$1,705.33 Step 2: Determine the present value of the 6th payment (single CF) that was missed: FV = \$253, N = 6, I = 7.9; compute PV = \$160.32 Step 3: Take the difference between these two values: \$1,705.33 - \$160.32 = \$1,545.01 5. Fifteen-percent compounded monthly implies a monthly interest rate of .15 / 12 = .
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern