Solution for Principle of Finance chapter 4
Chapter 4
1.
If you invest $1000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in the interim?
SOLUTION: n PV
FV
PMT
Result
20
2.
i
10
1000
?
0
FV =6,727.50
a.
If you invest $100 every year for the next 20 years, starting one year from today and you earn interest of 10% per year, how much will you have at the end of the 20 years?
b. How much must you invest each year if you want to have $50,000 at the end of the 20 years?
SOLUTION: n PV
FV
PMT
Result
a. 20
10
0
?
100
FV = 5,727.50
b. 20
3.
a.
b.
c.
d.
e.
i
10
0
50,000
?
PMT = 872.98
What is the present value of the following cash flows at an interest rate of 10% per year?
$100 received five years from now.
$100 received 60 years from now.
$100 received each year beginning one year from now and ending 10 years from now.
$100 received each year for 10 years beginning now.
$100 each year beginning one year from now and continuing forever.
SOLUTION: n i
PV
FV
PMT
Result
a. 5
10
?
100
0
PV = $62.09
b. 60
10
?
100
0
PV = $.3284
c. 10
10
?
0
100 ordinary
PV = $614.46
d. 10
10
?
0
100 immediate
PV = $675.90
e. Perpetuity
10
?
0
100 ordinary
See below
e. PV = $100 = $1,000
.10
Instructor’s Manual
Chapter 4
Page 50
4. You want to establish a “wasting” fund which will provide you with $1000 per year for four years, at which time the fund will be exhausted. How much must you put in the fund now if you can earn 10% interest per year? SOLUTION:
n
i
PV
FV
PMT
Result
4
10
?
0
1,000
PV =$3,169.87
5. You take a one-year installment loan of $1000 at an interest rate of 12% per year (1% per month) to be repaid in 12 equal monthly payments.
a. What is the monthly payment?
b. What is the
1.
If you invest $1000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in the interim?
SOLUTION: n PV
FV
PMT
Result
20
2.
i
10
1000
?
0
FV =6,727.50
a.
If you invest $100 every year for the next 20 years, starting one year from today and you earn interest of 10% per year, how much will you have at the end of the 20 years?
b. How much must you invest each year if you want to have $50,000 at the end of the 20 years?
SOLUTION: n PV
FV
PMT
Result
a. 20
10
0
?
100
FV = 5,727.50
b. 20
3.
a.
b.
c.
d.
e.
i
10
0
50,000
?
PMT = 872.98
What is the present value of the following cash flows at an interest rate of 10% per year?
$100 received five years from now.
$100 received 60 years from now.
$100 received each year beginning one year from now and ending 10 years from now.
$100 received each year for 10 years beginning now.
$100 each year beginning one year from now and continuing forever.
SOLUTION: n i
PV
FV
PMT
Result
a. 5
10
?
100
0
PV = $62.09
b. 60
10
?
100
0
PV = $.3284
c. 10
10
?
0
100 ordinary
PV = $614.46
d. 10
10
?
0
100 immediate
PV = $675.90
e. Perpetuity
10
?
0
100 ordinary
See below
e. PV = $100 = $1,000
.10
Instructor’s Manual
Chapter 4
Page 50
4. You want to establish a “wasting” fund which will provide you with $1000 per year for four years, at which time the fund will be exhausted. How much must you put in the fund now if you can earn 10% interest per year? SOLUTION:
n
i
PV
FV
PMT
Result
4
10
?
0
1,000
PV =$3,169.87
5. You take a one-year installment loan of $1000 at an interest rate of 12% per year (1% per month) to be repaid in 12 equal monthly payments.
a. What is the monthly payment?
b. What is the