Business Finance

PROBLEMS CHAPTER 2 1) If you deposit Rs.
100 in the bank today and it earns interest at a rate of 8% compounded annually, how much will be in the account 50 years from today? 2) On your birthday, your uncle gave you the money in his savings account. His only deposit was Rs.100 made 50 years ago. The savings account paid 8% compounded annually. How much money is in the account today? 3) A loaf of bread costs Rs.0.79 today. If its price increases by 6% per year, how much will an equivalent loaf cost in 20 years? 4) You ask a friend with some interest factor tables for PVF.09,6. He tells you that the number on his table is 1.677, but the heading of the table is torn off, so he does not know if 1.677 is PVF.09,6 or FVF.09,6. Without looking at another table, can you tell which it is? Why? If it is FVF.09,6, what is PVF.09,6? 5) How much money must you deposit in a savings account today to have Rs.20,000 in 20 years if the interest rate is 8% compounded annually? 6) A stock has paid dividends regularly for the last 20 years, starting with Rs.0.75 in 1964 and rising to Rs.4 in 1984. If these dividends have been growing at a constant rate, what has that rate been for the last 20 years? 7) Your sister borrows Rs.1,000 and promises to repay Rs.2,000. If you want at least a 5% return on your loan, within how many years must she pay you back? 8) Which would you prefer: Rs.1,000 now, Rs.2,000 in 5 years, or Rs.3,000 in 10 years if your time value of money is 12%? 9) Which would you prefer: Rs.3,000 now, Rs.2,000 that was placed in a savings account 5 years ago, or Rs.1,000 that was placed in a savings account 10 years ago if (a) your time value of money is 12%. (b) your time value of money is 16%. (c) your time value of money is 8%. 10) Using a discount rate of 12%, find the present value of Rs.100 received at the end of each of the next four years (a) using only the PVF table. (b) using only the PVFA table.
11) Using a discount rate of 12%, find the future value as of the end of year 4 of Rs.100 received at the end of each of the next four years (a) using only the FVF table. (b) using only the FVFA table. (c) using only your answer to problem 10 and the fact that FVF.12,4 = 1.5735. 12) You ask a friend with some interest factor tables for PVFA.09,6 and she tells you that the number on her table is 7.5233, but the heading on the table is torn off, she does not know if 7.5233 is PVFA.09,6 or FVFA.09,6. Without looking at another table, can you tell which it is? Why? 13) How much must you save at the end of each of the next 10 years to have Rs.100,000 at the end of the 10th year if the interest rate is 10%? 14) If the discount rate is 12%, what is the present value of Rs.200 received at the end of each of the next 10 years except for the fourth year (i.e., you get payments at the end of years 1,2, 3, 5, 6, 7, 8, 9, and 10)? 15) If the discount rate is 14%, what is FV10 of Rs.300 received at the end of each of the next 10 years except for the fourth year? 16) What is the present value of a seven-year Rs.1,000 annuity if the first Rs.1,000 payment is made four years from today and the discount rate is 15%? 17) What is FV12 of a 10-year Rs.500 annuity for which the first Rs.500 payment is made at the end of the 3M year (and the 10th payment at the end of the 12th year) if the discount rate is 16%? 18) What is the present value of a 20-year annuity due with Rs.1,000 payments if the discount rate is 8%? [Hint: Assume that a payment made at the end of one year (as in an ordinary annuity) has the same present value as a payment made at the beginning of the next year (as in an annuity due). 19) What is FV10 of a 10-year annuity due with payments of Rs.1,000 if the discount rate is 10%? 20) How much must you deposit at the end of each year for 15 years to be able to withdraw Rs.500 at the end of 10 years and Rs.1,000 at the end of 15 years if your savings draw interest at an annual rate of 7%?
21) You are buying a Rs.100,000 home with a 30-year mortgage requiring payments to be made at the end of each year. The interest rate is 10% for the first 15 years of the mortgage but then increases to 15% for the last 15 years. How much will your annual payments be? 22) If you deposit Rs.100 in a savings account today, and keep it there for 50 years, how much would be in the account if the interest were 8% compounded semiannually? If it were 8% compounded quarterly? (Note: FVF.04,100 = 50.505 and FVF.02,200 = 52.485.) 23) A device is for sale that will save you 10% of your utility bill every year. Your time value of money is 12% and your utility bill is Rs.500 per year. Assuming that your utility bill remains constant and that you (and your heirs) will be around to enjoy the benefits of the device forever, how much should you be willing to pay for it? 24) You plan to retire in 40 years, at which time you want enough in a savings account to allow you to withdraw Rs.20,000 at the beginning of each of the subsequent 10 years (an insurance policy will support you if you live for more than 10 years after you retire). (a) If the savings account pays interest at an annual rate of 9%, how much must you have saved up by the end of the fortieth year? (b) If you deposit a fixed sum of money in the savings account at the end of each of the next 40 years to achieve the retirement goal of part (a), how much must you deposit each year? (c) Same as part (b), except that this time you only save for 20 years (at the end of each of years 21 through 40). 25) You are trying to decide whether to buy a Rs.2,500 motorcycle on credit or to save money to buy it in 30 months. If you buy on credit, you will make 30 equal end-of-the-month payments at a finance charge of 2% per month. If you save money to buy it in 30 months, you will earn 1% per month on your savings. However, the semiannual inflation rate is 5%, so the motorcycle will cost more in 2.5 years. (Suppose that you don't care when you take possession of the motorcycle; that is, you will make your decision solely on the basis of which plan has lower monthly requirements.) (a) What will your monthly payments be if you buy on credit? (b) What must your monthly deposits be if you choose to save money and buy it in 30 months? (c) What should you do?
26) Your brother has just graduated from high school and is seeking your advice as to whether he should find a job immediately or go to college for four years and then find a job. He estimates that if he gets a job immediately, he will earn Rs.15,000 per year for the next 40 years. If he goes to college first, he estimates that he can earn Rs.30,000 for each of the 36 years after he gets out. (Whether he goes to college or not, he plans to retire 40 years from today.) He also estimates that the four years of college will cost him Rs.8,000 each. Assume that his time value of money is 14% and that all cash flows are ordinary annuities. (If he goes to college first, he can borrow money at 14%, too.) (a) What will be the present value of his cash flows if he gets a job immediately? (b) What will be the present value of his cash flows if he goes to college first? (c) What should he do? 27) Consider an investment that pays Rs.80 in interest every year plus Rs.1,000 when it matures in 12 years. You can buy the investment today for Rs.753. What is the IRR of this investment? (Use a financial calculator for this problem.) 28) An automobile costs Rs.10,000 now, requires Rs.1,000 annually to maintain, and has a salvage value of Rs.2,000 at the end of eight years. Your time value of money is 9%. What is the NPV of these cash flows?

Business Finance

Uploaded by

Copyright:

Available Formats

Business Finance

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business Finance

Uploaded by

Copyright:

Available Formats

PROBLEMS CHAPTER 2 1) If you deposit Rs.

You might also like