1. Toadies, Inc., has identified an investment project with the following cash flows.
Year Cash Flow
1 $ 1,525
2 1,645
3 1,730
4 1,780
If the discount rate is 8 percent, what is the future value of the cash flows in year 4?
Future value $
If the discount rate is 11 percent, what is the future value of the cash flows in year 4?
Future value $
If the discount rate is 24 percent, what is the future value of the cash flows in year 4?
Future value $
2. The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 5.30 percent, how much will you pay for the policy?
Present value $
3.First National Bank charges 13.6 percent compounded monthly on its business loans. First United Bank charges 13.9 percent compounded semiannually.
Calculate the EAR for First National Bank and First United Bank.
EAR
First National %
First United %
As a potential borrower, which bank would you go to for a new loan?
4. Wainright Co. has identified an investment project with the following cash flows.
Year Cash Flow
1 $ 920
2 1,330
3 1,590
4 1,775
If the discount rate is 10 percent, what is the present value of these cash flows?
What is the present value at 20 percent?
What is the present value at 30 percent?
5. An investment offers $6,500 per year for 20 years, with the first payment occurring one year from now.
If the required return is 7 percent, what is the value of the investment?
What would the value be if the payments occurred for 45 years?
What would the value be if the payments occurred for 70 years?
What would the value be if the payments occurred forever?
6. Find the EAR in each of the following cases
Stated Rate (APR) Number of Times Compounded Effective Rate (EAR)
10.0 % Quarterly %
19.0 Monthly
15.0 Daily
12.0 Infinite
7. You are planning to make monthly deposits of $390 into a retirement account that pays 8 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 25 years?
8.Investment X offers to pay you $5,000 per year for eight years, whereas Investment Y offers to pay you $7,100 per year for five years.
Calculate the present value for Investment X and Y if the discount rate is 5 percent.
Present value
Investment X $
Investment Y $
Calculate the present value for Investment X and Y if the discount rate is 15 percent.
Investment X $
Investment Y $
9. You want to buy a new sports coupe for $82,500, and the finance office at the dealership has quoted you a 6.4 percent APR loan for 72 months to buy the car.
What will your monthly payments be?
What is the effective annual rate on this loan?
10. You're prepared to make monthly payments of $310, beginning at the end of this month, into an account that pays 7.2 percent interest compounded monthly.
How many payments will you have made when your account balance reaches $22,000?
Number of payments
11. You want to be a millionaire when you retire in 40 years.
How much do you have to save each month if you can earn an 11.6 percent annual return?
How much do you have to save each month if you wait 10 years before you begin your deposits?
How much do you have to save each month if you wait 20 years before you begin your deposits?