1 At what annual rate would 550 have to be invested today in order to grow to 2 142 78 in 12 years A B C D E 10 0 10 5 11 0 12 0 None of the above 2 In 12 years you plan to retire and buy a house in Norman OK 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 A B C D E 20 361 16 188 12 177 14 820 20 343 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 periods 11 through 15 plus an additional amount of 15 000 in that last year period 15 Assume an interest rate of 9 A B C D E 50 136 2 608 20 548 23 223 None of the above 4 Suppose you borrow 8 000 and agree to repay the loan in 4 equal installments over a 4 year period The interest rate on the loan is 13 per year What is the amount of the reduction in principal in year 2 A 1 040 B 1 864 C 2 690 D 826 E 2000 5 Leo s grandfather deposited 800 in a savings account for him when he was born The money has been earning an annual rate of 15 interest compounded quarterly for the last 15 years He now wants to buy a new car How much does he have in this account to use A 7 284 B 6 829 C 2438 D 6 103 E 1 500 6 Consider the following set of cash flows to be received over the next 3 years End of Year Cash flow 1 100 2 225 3 300 If the discount rate is 10 how would we write the formula to find the Future Value of this set of cash flows at year 3 a b 100 1 10 225 1 10 300 1 10 c 100 1 10 3 225 1 10 2 300 1 10 d 100 1 10 2 225 1 10 300 7 You want to buy a car and a local bank will lend you 21 000 The loan will be fully amortized over 5 years 60 months and the nominal interest rate will be 6 with interest paid monthly What will be the interest payment in the second month A B C D E 406 1 299 4 103 5 1 257 6 350 8 Suppose you win 100 million in lottery The money is paid in equal annual installments of 4 million over 25 years If the appropriate discount rate is 10 how much is the sweepstakes actually worth today A 100 000 000 B 4 000 000 C 36 308 160 D 42 699 100 E 45 537 760 9 To buy a new house you must borrow 270 000 To do this you take out a 270 000 30 year 9 mortgage Your mortgage payments which are made at the end of each year one payment each year include both principal and 9 interest on the declining balance How large will your annual payments be A B C D E 24 334 26 281 25 000 82 809 107 651 BRIGHAM AND HOUSTON End of chapter questions 5 5 TIME TO REACH A FINANCIAL GOAL You have 42 180 53 in a brokerage account and you plan to deposit an additional 5 000 at the end of every future year until your account totals 250 000 You expect to earn 12 annually on the account How many years will it take to reach your goal 5 6 FUTURE VALUE ANNUITY VERSUS ANNUITY DUE What s the future value of a 7 5 year ordinary annuity that pays 300 each year If this was an annuity due what would its future value be 5 8 LOAN AMORTIZATION AND EAR You want to buy a car and a local bank will lend you 20 000 The loan will be fully amortized over 5 years 60 months and the nominal interest rate will be 12 with interest paid monthly What will be the monthly loan payment What will be the loan s EAR 5 3 FINDING THE REQUIRED INTEREST RATE Your parents will retire in 18 years They currently have 250 000 saved and they think they will need 1 000 000 at retirement What annual interest rate must they earn to reach their goal assuming they don t save any additional funds 5 11 GROWTH RATES Shalit Corporation s 2013 sales were 12 million Its 2008 sales were 6 million a At what rate have sales been growing b Suppose someone made this statement Sales doubled in 5 years This represents a growth of 100 in 5 years so dividing 100 by 5 we find the growth rate to be 20 per year Is the statement correct 5 13 TIME FOR A LUMP SUM TO DOUBLE How long will it take 200 to double if it earns the following rates Compounding occurs once a year a 7 b 10 c 18 d 100 5 16 PRESENT VALUE OF A PERPETUITY What is the present value of a 100 perpetuity if the interest rate is 7 If interest rates doubled to 14 what would its present value be 5 17 EFFECTIVE INTEREST RATE You borrow 85 000 the annual loan payments are 8 273 59 for 30 years What interest rate are you being charged 5 23 FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find the amount to which 500 will grow under each of these conditions a 12 compounded annually for 5 years b 12 compounded semiannually for 5 years c 12 compounded quarterly for 5 years d 12 compounded monthly for 5 years e 12 compounded daily for 5 years f Why does the observed pattern of FVs occur