tvmpracticeset1solutions

# 4 5 6 7 pv 1000 3000 the pvif t t r 0938 1 1 1 1 on

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4 5 6 7 PV = ? 1,000 3,000 The PVIF = t t r ..) 0938 . 1 ( 1 ) 1 ( 1 = + On your calculator do the following: First payment: \$1,000 / (1.0938..) 2 = \$835.83 N I PV PMT FV 2 9.38… CPT 1,000 -835.83 Second payment: \$1,000 / (1.0938..) 7 = \$1,601.54 N I PV PMT FV 7 9.38.. CPT 3,000 -1,601.54 Total present value = \$835.83 + \$1,601.54 = \$2,437.37 If you use the number of months and a monthly rate, you would have the following: The monthly timeline looks like this: 0 ….. 24 …. 84 PV = ? 1,000 3,000 F301 TVM practice set I solutions 4

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The PVIF = t t r ) 0075 . 1 ( 1 ) 1 ( 1 = + On your calculator do the following: First payment: \$1,000 / (1.0075) 24 = \$835.83 N I PV PMT FV 24 0.75 CPT 1,000 -835.83 Second payment: \$1,000 / (1.0075) 84 = \$1,601.54 N I PV PMT FV 84 0.75 CPT 3,000 -1,601.54 Total present value = 835.83 + 1,601.54 = \$2,437.37 7. Compute the effective annual rate by compounding the periodic rate for one year, according to the EAR formula: [ ] - + = - + = 1 1 1 ) 1 ( year per periods year per periods year per periods decimal a as APR rate periodic EAR a. EAR for Bank A = 9.0% EAR for Bank B = = - + 1 12 0875 . 0 1 12 9.11% EAR for Bank C = = - + 1 365 0865 . 0 1 365 9.034% b. Bank A offers the best rate from the borrower’s perspective, because it offers the lowest effective annual rate . F301 TVM practice set I solutions 5
8. First you need to find the periodic rate that matches the monthly cash flows. An APR of 9.6% compounded monthly means the periodic rate is 9.6 ÷ 12 = 0.8 % per month. Then the timeline looks like this: 0 1 2 60 PV = ? -600 -600 -600 Now that you have a series of sixty, level, monthly cash flows (an ordinary annuity) and a monthly rate, you can solve for PV, the amount you can borrow based on that monthly payment. On your financial calculator: APV = \$600 * - 008 .

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