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5 views2 pages

Assignment

Uploaded by

giang vũ
Copyright
© © All Rights Reserved
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EXERCISE 3

1. You are offered an annuity that will pay $24,000 per year for 11 years (the first
payment will occur one year from today). If you feel that the appropriate discount rate
is 13%, what is the annuity worth to you today?
−n −11
1−(1+r )❑ 1−(1+0.13)❑
PV =PMT =$ 24,000 =$ 136,486.6
r 0.13
2. If you deposit $16,000 per year for 12 years (each deposit is made at the end of
each year) in an account that pays an annual interest rate of 14%, what will your
account be worth at the end of 12 years?

For the future value of annuity:


n 12
(1+ r)❑ −1 (1+0.14)❑ −1
FV =PMT =$ 16,000 =$ 436,331.98
r 0.14
3. You plan to borrow $389,000 now and repay it in 25 equal annual installments
(payments will be made at the end of each year). If the annual interest rate is 14%,
how much will your annual payments be?
−25
1−1.14 ❑
PV =PMT =$ 389,000 ⇒ PMT =$ 56,598.9
0.14
4. You are valuing an investment that will pay you $27,000 per year for the first ten
years, $35,000 per year for the next ten years, and $48,000 per year the following ten
years (all payments are at the end of each year). If the appropriate annual discount
rate is 9.00%, what is the value of the investment to you today?
−10
1−1.09 ❑
PV 1=$ 27,000 =$ 173,276.76
0.09
−10
1−1.09 ❑ −10
PV 2=$ 35,000 1.09 ❑ =$ 94,881.08
0.09
−10
1−1.09❑ −20
PV 3=$ 48,000 1.09❑ =$ 54,965.2
0.09
PV =PV 1+ PV 2+ PV 3=$ 323,123.04
5. John and Peggy recently bought a house. They financed the house with a $125,000,
30- year mortgage with a nominal interest rate of 7 percent. Mortgage payments are
made at the end of each month. What total dollar amount of their mortgage payments
during the first three years will go towards repayment of principal?
−30
1−1.07 ❑
PV =PMT =$ 125,000 ⇒ PMT =$ 10,073.3
0.07

Year Instalment Payment of Payment of Outstanding


interest principal balance left

1 $10,073.3 $8750 $1323.3 $123,676.7


2 $10,073.3 $8657.37 $1415.93 $122,260.77

3 $10,073.3 $8558.25 $1515.05 $120,745.72

Total $4254.28

As can be seen, the total dollar amount of their mortgage payments during the first three
years will go towards $4254.28 of repayment of principal.

6. You are valuing an investment that will pay you $26,000 per year for the first 9
years, $34,000 per year for the next 11 years, and $47,000 per year the following 14
years (all payments are at the end of each year). Another similar risk investment
alternative is an account with a quoted annual interest rate of 9.00% with monthly
compounding of interest. What is the value in today's dollars of the set of cash flows
you have been offered?

(Data are inadequate)

7. You are told that if you invest $11,100 per year for 19 years (all payments made at
the beginning of each year) you will have accumulated $375,000 at the end of the
period. What annual rate of return is the investment offering?
19
(1+r )❑ −1
FV =$ 11,100 (1+ r)=$ 375,000⇒ r=5.48 %
r
(Find r by Excel: =RATE(19,-11100,,375000,1))

8. You are planning for retirement 34 years from now. You plan to invest $4,200 per
year for the first 7 years, $6,900 per year for the next 11 years, and $14,500 per year
for the following 16 years (assume all cash flows occur at the end of each year). If you
believe you will earn an effective annual rate of return of 9.7%, what will your
retirement investment be worth 34 years from now?
7
1.097 ❑ −1 27
FV 1=$ 4,200 1.097❑ =$ 480,799.87
0.097
17
1.097❑ −1 16
FV 2=$ 6,900 1.097❑ =$ 553,392.01
0.097
16
1.097 ❑ −1
FV 3=$ 14,500 =$ 508,025.38
0.097
FV =FV 1+ FV 2+ FV 3=$ 1,542,217.26

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