Section 3.

7
40.An automobile is priced at $7,000. A buyer may purchase the car
for $6,500 now, or alternatively, the buyer can make a down
payment of $1,000 now and pay the remaining $6,000 in eight
equal quarterly payments (over 2 years) at 8 percent compounded
quarterly.
a. If the buyers TVOM is 10 percent per year compounded quarterly,
would the buyer prefer to pay the $6,500 outright, or make the
down payment and the quarterly payments?
b. What is the effective annual interest rate at which these two
payment options are equivalent?
41.Consider the following two cash flow series of payments: Series A is
a geometric series increasing at a rate of 8 percent per year. The
initial cash payment at the end of year 1 is $1,000. The payments
occur annually for 5 years Series B is a uniform series with
payments of value X occurring annually at the end of years 1
through 5. You must make the payments in either Series A or Series
B.
a. Determine the value of X for which these two series are equivalent if
your TVOM is i = 6.5 percent.
b. If your TVOM is 8 percent, would you be indifferent between these
two series of payments? If not, which do you prefer?
c. If your TVOM is 5 percent, would you be indifferent between these
two series of payments? If not, which do you prefer?
42.Kinnunen Company wishes to give its customers three options on
payments for office equipment when the initial purchase price is
over a certain amount. For example, the following three payment
plans are options on a typical purchase, and Kinnunen wants to be
sure they are equivalent at their TVOM of 14 percent. Determine
the values of Q and R.

End of Year Option 1 Option 2 Option 3

0 $0 $0 $0
1 1,800 Q R
2 1,800 2Q (l.l)R
3 1,800 3Q (1.1)2R
4 1,800 4Q (1.1)3R
5 1,800 5Q (1.1)4R

43.Consider the following three cash flow series:

End of Year Cash Flow Series A Cash Flow Series B Cash Flow Series C

0 -$1,000 -$2,500 Y
1 X 3,000 Y
2 ].5X 2,500 Y
 3 2.OX 2,000 2Y
4 2.5X 1,500 2Y
5 3.0X 1,000 2Y

Determine the values of X and Y so that all three cash flows are equivalent
at an interest rate of 15 percent per year compounded yearly
44. Consider the following three cash flow series:

End of Year Cash Flow Series A Cash Flow Series B Cash Flow Series C
0 $3.0X $1,000
2y
1 2.5X 1,500
2Y
2 2.0X 2,000 2Y
3 1.5X 2,500 Y
4 1.0X 3,000 Y
5 -1,000 -2,500 Y

Determine the values of X and Y so that you are indifferent between all three cash flows
if your TVOM is 11% per year compounded yearly.
45. Zetterberg Builders is given two options for making payments on a brush hog. Find
the value of X such that they would be indifferent between the two cash flow profiles
if their TVOM is 12 percent per year compounded yearly.
End of Year Series 1 Series 2

0 $150 $0
1 $200 $0
2 $250 $35X
3 $300 $25X
4 $0 $15X
5 $0 $5X

Section 3.9
58. You have $2,000 that you want to invest at the beginning of each of 5 years. The
following alternatives are available to you:
An investment that pays 7 percent for year 1,6 percent for year 2,5
percent for year 3,4 percent for year 4, and 3 percent for year 5.
An account that pays 3 percent for year 1, 4 percent for year 2, 5
percent for year 3,6 percent for year 4, and 7 percent for year 5.
An account that pays 5 percent per year each year.
On the basis of available balance at the end of year 5, which alternative is
the best choice?

60. Consider the following cash flows and interest rates:

End of Year Interest Rate during Period Cash Flow at End of Period

0 $0
1 10% $2,000
2 8% -$3,000
3 12% $4,000
a. Determine the future worth of this series of cash flows.

b. Determine the present worth of this series of cash flows.

c. Determine a 3-year uniform annual series that is equivalent to the

original series.