MGF 301Spring 2009Assignment 1 Review Sheet1. The following formulas will help you too solve parts A, B, C.(a) PV = FV/(1+r)^t(b) Same formula as (a). Note: for monthly payments, be sure to use a monthly interest rate (divide r by 12) and make t=number of months.(c) FV = PV(1+r)^t It may be helpful to draw a timeline for part C. 2. The following perpetuity formula will help you to solve question 2. Because this perpetuity does not start today, you must then discount the answer to today’s value. Remember the perpetuity formula gives an answer that is one period earlier in time than the first cash flow.3. This can only be solved by trial and error. You can use the following formula to solve for the interest rate. (Hint: The easiest way to do this is by using the PV equation in Excel =pv(r,t,c). Use trial and error to change the rate until you get the correct present value.)Remember this is a monthly calculation, so you need to use a monthly r and make t = number of months. The result will be a monthly r. You then need to make this an annual number for the answer.4. You should solve this problem in two steps. First, find the present value and then you can plug it into the PV of annuity formula (see 3). Remember that you are solving for cash flows in this problem. (In Excel, you would use formula =PMT(r,t,pv)).rCPV trrrCPV)1(11Part B is similar to A except you should use monthly compounding to find the present value. Then, in finding the cash flow in the annuity, you will need to use the EAR formula to find the annual rate with monthly compounding.EAR = [(1+r/12)^12] -
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