Chapter 5 Selected Questions and Problems – Week 5 Fin 324
Seventh Edition
Questions:
52
True. The second series is an uneven cash flow stream, but it contains an annuity of $400
for 8 years. The series could also be thought of as a $100 annuity for 10 years plus an
additional payment of $100 in Year 2, plus additional payments of $300 in Years 3 through
10.
54
For the same stated rate, daily compounding is best. You would earn more “interest on
interest.”
Problems:
51
0
1


PV = 10,000
2

3

4

5

FV5 = ?
FV5 = $10,000(1.10)5
= $10,000(1.61051) = $16,105.10.
Alternatively, with a financial calculator enter the following: N = 5, I/YR = 10, PV = 10000,
and PMT = 0. Solve for FV = $16,105.10.
53
0

PV = 250,000
18

FV18 = 1,000,000
With a financial calculator enter the following: N = 18, PV = 250000, PMT = 0, and FV =
1000000. Solve for I/YR = 8.01% ≈ 8%.
55
0
1


PV = 42,180.53 5,000
2
N – 2

• • •

5,000
5,000
N – 1

5,000
N

FV = 250,000
Using your financial calculator, enter the following data: I/YR = 12; PV = 42180.53; PMT =
5000; FV = 250000; N = ? Solve for N = 11. It will take 11 years to accumulate $250,000.
59
a.
0

1

$500(1.06) = $530.00.
500
FV = ?
Using a financial calculator, enter N = 1, I/YR = 6, PV = 500, PMT = 0, and FV = ?
Solve for FV = $530.00.
b.
0

500
1

2

$500(1.06)2 = $561.80.
FV = ?
Using a financial calculator, enter N = 2, I/YR = 6, PV = 500, PMT = 0, and FV = ?
Solve for FV = $561.80.
c.
0

PV = ?
1

500
$500(1/1.06) = $471.70.
Using a financial calculator, enter N = 1, I/YR = 6, PMT = 0, and FV = 500, and PV = ?
Solve for PV = $471.70.
d.
0

PV = ?
1

2

$500(1/1.06)2 = $445.00.
500
Using a financial calculator, enter N = 2, I/YR = 6, PMT = 0, FV = 500, and PV = ?
Solve for PV = $445.00.
511
a. 2005

6
2006

2007

20082009 2010



12 (in millions)
With a calculator, enter N = 5, PV = 6, PMT = 0, FV = 12, and then solve for I/YR =
14.87%.
b. The calculation described in the quotation fails to consider the compounding effect of
interest. It can be demonstrated to be incorrect as follows:
$6,000,000(1.20)5 = $6,000,000(2.48832) = $14,929,920,
which is greater than $12 million. Thus, the annual growth rate is less than 20%; in fact,
it is about 15%, as shown in Part a.