1. You have an expected liability (cash outflow) of $500,000 in
10 years, and you use a discount rate of 10%. a. How much would you
need right now as savings to cover the expected liability? b. How
much would you need to set aside at the end of each year for the
next 10 years to cover the expected liability? 2. You have just
taken a 30-year mortgage loan for $200,000. The annual percentage
rate on the loan is 8%, and payments will be made monthly. Estimate
your monthly payments. 3. A company is planning to set aside money
to repay $100 million in bonds that will be coming due in 10 years.
If the appropriate discount rate is 9%, a. how much money would the
company need to set aside at the end of each year for the next 10
years to be able to repay the bonds when they come due? b. how
would your answer change if the money were set aside at the
beginning of each year? 4. You have an relative who has accumulated
savings of $ 250,000 over his working lifetime and now plans to
retire. Assuming that he wishes to withdraw equal installments from
these savings for the next 25 years of this life, how much will
each installment amount to if he is earning 5% on his savings? 5.
Find the values for the following: a. An initial $500 compounded
for 1 year at 6 percent. b. An initial $500 compounded for 2 years
at 6% percent. c. The present value of $500 due in 1 year at a
discount rate of 6 percent. d. The present value of $500 due in 2
years at a discount rate of 6 percent 6. What is the monthly
payment on a 5 year car loan for $14,000 at an annual interest rate
of 12%? 7. Which grows to a larger future value: a. $4000 invested
for 10 years at 5% or b. $2000 invested for 10 years at 10%. 8.
Which is worth more at 10 percent, compounded annually: $1000 in
hand today or $2,000 due in 5 years? 9. A paper company invests $4m
to clear a tract of land and plant some young pine trees. The trees
will mature in 10 years, at which time the forest will have a
market value of $8m. What is the expected rate of return for the
paper company's investment? 10. A 1987 advertisement in the New
Yorker solicited offers on a 1967 Mercury Cougar XR7 (Motor Trend's
1967 car of the year) that had been stored undriven in a climate
controlled environment for 20 years. If the original owner paid
$4000 for this car in 1967, what price would he have to receive in
1987 to obtain a 10 percent annual return on his investment? 11.
Vincent Van Gogh sold only one painting during his lifetime, for
about $30. A sunflower still life he painted in 1888 sold for
$39.85 million in 1988,, more than three times the highest price
paid previously for any work of art. If this painting had been
purchased for $30 in 1888 and sold in 1988 for $39.85 million, what
would have been the annual rate of return? 12. In 1940, your
grandmother put $1000 into a special trust to be paid to a future
grandchild
(you) 60 years later, in the year 2000. How much will this trust
be worth in the year 2000 if it has been earning 8%? How much if it
earns 12%. 13. A lottery jackpot of one million is paid out $25,000
a year for 40 years. At a 10 percent required return, what is the
present value of this payoff? Assume that the first payment is paid
immediately. 14. At an interest rate of 10%, what is present value
of $1m to be received in: a. 10 years b. 50 years c. 100 years d.
150 years 15. John is considering the purchase of a lot. He can buy
the lot today and expects the price to rise to $15,000 at the end
of 10 years. He believes that he should earn an investment yield of
10 percent annually on this investment. The asking price for the
lot is $7,000. Should he buy it? What is the annual yield (internal
rate of return) of the investment if John purchases the property
for $7,000 and is able to sell it 10 years later for $15,000?
16. An investor can make an investment in a real estate
development and receive an expected cash return of $45,000 after
six years. Based on a careful study of other investment
alternatives, she believes that an 18 percent annual return
compounded quarterly is a reasonable return to earn on this
investment. How much should she pay for it today? 17. Suppose you
have the opportunity to make an investment in a real estate venture
that expects to pay investors $750 at the end of each month for the
next eight years. You believe that a reasonable return on your
investment should be 17 percent compounded monthly. How much should
you pay for the investment?18. A loan of $50,000 is due 10 years
from today. The borrower wants to make annual
payments at the end of each year into a sinking fund that will
earn interest at an annual rate of 10 percent. What will the annual
payments have to be? 20. Suppose you deposit $5,000 into an account
earning 4 percent interest, compounded monthly. a) How many years
will it take for your account to be worth $7,500? 21. Consider an
investment that will pay $680 per month for the next 15 years and
will be worth $28,000 at the end of that time. How much is this
investment worth to you today at a 5.25 percent discount
rate?CVFORMULAS Present Value (PV) - Single Sum
Future Value (FV) - Single Sum
Present Value (PV) - Ordinary Annuity
( Future Value (FV) - Ordinary Annuity
Annuity Due
