FIN 3303 1st Edition Lecture 3 Practice Problems 1 Suppose you win the Publishers Clearinghouse 1 million sweepstakes The money is paid in equal annual installments of 33 333 33 over 30 years If the appropriate discount rate is 8 how much is the sweepstakes actually worth today N 30 I Y 8 PV PMT 33 333 33 FV 0 PV 375 256 4 2 In 12 years you plan to retire and buy a house in Norman Oklahoma The house you are looking at currently costs 145 000 and is expected to increase in value each year at a rate of 5 Assuming you can earn 10 annually on your investment how much must you invest at the end of each of the next 12 years to be able to buy your dream home when you retire Find FV first N 12 I Y 5 PV 145 000 PMT 0 FV FV 260 399 2 Now find Payment N 12 I Y 10 PV 0 PMT FV 260 399 2 PMT 12 177 1 3 How much do you have to deposit today so that beginning 11 years from now you can withdraw 10 000 a year for the next 5 years 11 periods through 15 plus an additional amount of 15 000 in that last year period 15 Assume an interest rate of 9 Find PV for last 5 years first N 5 I Y 9 PV PMT 10 000 FV 15 000 Put FV as 15 000 for the calculator to add the additional 15 000 for the last year PV 48 645 5 Find PV for today N 10 I Y 9 PV PMT 0 FV 48 645 5 PV 20 548 4