Chapter 9

Problems
1. You invest $3,000 a year for three years at 12 percent.
a. What is the value of your investment after one year? Multiply $3,000 1.12.
b. What is the value of your investment after two years? Multiply your answer to part a
by 1.12.
c. What is the value of your investment after three years? Multiply your answer to part b
by 1.12. This gives your final answer.
d. Confirm that your final answer is correct by going to Appendix A (future value of $1),
and looking up the future value for n = 3, and i = 12 percent. Multiply this tabular
value by $3,000 and compare your answer to the answer in part c. There may be a
slight difference due to rounding.

9-1. Solution: Using Financial Calculator

a.
____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 1 | 12 | 3000 | 0 |CPT FV- 3,360|
____________________________________________________________
Answer: $3,360

b.
______________________________________________________________
| N | I/Y | PV | PMT | FV |
______________________________________________________________
| 2 | 12 | 3000 | 0 |CPT FV-3,763.20|
______________________________________________________________
Answer: $3,763.20

c.
______________________________________________________________
| N | I/Y | PV | PMT | FV |
______________________________________________________________
| 3 | 12 | 3000 | 0 |CPT FV-4,214.78|
______________________________________________________________
Answer: $4,214.78

S9-1
2. What is the present value of:
a. $9,000 in 7 years at 8 percent?
b. $20,000 in 5 years at 10 percent?
c. $10,000 in 25 years at 6 percent?
d. $1,000 in 50 years at 16 percent?

9.2. Solution: Using Financial Calculator

a.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 7 | 8 |CPT PV -5,251.41 | 0 | 9000 |
__________________________________________________________________
Answer: $5,251.41

b.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 5 | 10 |CPT PV -12,418.43 | 0 | 20000 |
__________________________________________________________________
Answer: $12,418.43

c.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 25 | 6 |CPT PV -2,329.99 | 0 | 10000 |
__________________________________________________________________
Answer: $2,329.99

d.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 16 |CPT PV- 0.60 | 0 | 1000 |
__________________________________________________________________

3. You will receive $5,000 three years from now. The discount rate is 8 percent.
a. What is the value of your investment two years from now? Multiply $5,000 .926
(one years discount rate at 8 percent).
b. What is the value of your investment one year from now? Multiply your answer to
part a by .926 (one years discount rate at 8 percent).

S9-2
 c. What is the value of your investment today? Multiply your answer to part b by .926
(one years discount rate at 8 percent).
d. Confirm that your answer to part c is correct by going to Appendix B (present value
of $1) for n = 3 and i = 8%. Multiply this tabular value by $5,000 and compare your
answer to part c. There may be a slight difference due to rounding.

9-3. Solution: Using Financial Calculator

a.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 1 | 8 |CPT PV -4,629.63 | 0 | 5000 |
__________________________________________________________________
Answer: $4,629.63

b.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 2 | 8 |CPT PV -4,286.69 | 0 | 5000 |
__________________________________________________________________
Answer: $4,286.39
c.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 3 | 8 |CPT PV -3,969.16 | 0 | 5000 |
__________________________________________________________________
Answer: $3,969.16
4. If you invest $9,000 today, how much will you have:
a. In 2 years at 9 percent?
b. In 7 years at 12 percent?
c. In 25 years at 14 percent?
d. In 25 years at 14 percent (compounded semiannually)?

9-4. Solution: Using Financial Calculator

a.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 2 | 9 | 9000 | 0 |CPT FV -10,692.60|
________________________________________________________________
S9-3
Answer: $10,692.60

S9-4
b.
_________________________________________________________________
| N | I/Y | PV | PMT | FV |
_________________________________________________________________
| 7 | .12 | 9000 | 0 |CPT FV -19,896.13|
_________________________________________________________________
Answer: $19,896.13
c.
_________________________________________________________________
| N | I/Y | PV | PMT | FV |
_________________________________________________________________
| 25 | .14 | 9000 | 0 |CPT FV -238,157.24|
__________________________________________________________________
Answer: $238,157.24
d.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | .07 | 9000 | 0 |CPT FV -251,113.23|
__________________________________________________________________
Answer: $251,113.23

5. Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is discounted
at 12 percent, which should you choose?

9-5. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 12 |CPT PV -103.81 | 0 | 30000 |
__________________________________________________________________
Answer: $103.81
6. Your aunt offers you a choice of $60,000 in 40 years or $850 today. If money is discounted
at 11 percent, which should you choose?

9-6. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 40 | 11 |CPT PV -923.06 | 0 | 60000 |
__________________________________________________________________

Answer: $923.06
S9-5
7. You are going to receive $100,000 in 50 years. What is the difference in present value
between using a discount rate of 14 percent versus four percent?

9-7. Solution: Using Financial Calculator

PV at 14%
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 14 |CPT PV -142.81 | 0 | 100000 |
__________________________________________________________________
Answer: $142.81

PV at 4%
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 4 |CPT PV -14,071.26 | 0 | 30000 |
__________________________________________________________________
Answer: $14,.071.26

A difference of 14,071.26 142.81 = $13,928.45

8. How much would you have to invest today to receive:

a. $15,000 in 8 years at 10 percent?
b. $20,000 in 12 years at 13 percent?
c. $6,000 each year for 10 years at 9 percent?
d. $50,000 each year for 50 years at 7 percent?

9-8. Solution: Using Financial Calculator

a.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 8 | 10 |CPT PV -6,997.61 | 0 | 15000 |
__________________________________________________________________
Answer: $6,997.61

S9-6
b.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 12 | 13 |CPT PV -4,614.12 | 0 | 20000 |
__________________________________________________________________
Answer: $4,614.12
c.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 9 |CPT PV -38,505.95 | 6000 | 0
__________________________________________________________________
Answer: $38,505.95
d.
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 7 |CPT PV -690,037.31 | 50000 | 0 |
__________________________________________________________________
Answer: $690,037.31

9. If you invest $2,000 a year in a retirement account, how much will you have:

a. In 5 years at 6 percent?
b. In 20 years at 10 percent?
c. In 40 years at 12 percent?

9-9. Solution: Using Financial Calculator

a.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 5 | 6 | 0 | 2000 |CPT FV -11,274.19|
________________________________________________________________
Answer: $11,274.19

b.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 20 | 10 | 0 | 2000 |CPT FV- 114,550 |
________________________________________________________________
Answer: $114,550
S9-7
c.
___________________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________________
| 40 | 12 | 0 | 2000 |CPT FV -1,534,182.84|
___________________________________________________________________
Answer: $1,534,182.84

10. You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you
take the proceeds and invest them for 12 years at 15 percent. How much will you have
after 17 years?

9-10. Solution: Using Financial Calculator

The first part FV after 10 years
________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 5 | 10 | 10000 | 0 |CPT FV -16,105.10|
________________________________________________________________
Answer: $16,105.1

The Second part the future value after the next 12 years
________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 12 | 15 | 16,105.10 | 0 |CPT FV -86,166.31|
________________________________________________________________
Answer: $86,166.31
11. Jean Splicing will receive $8,500 a year for the next 15 years from her trust. If a 7 percent
interest rate is applied, what is the current value of the future payments?

9-11. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 15 | 7 |CPT PV -77,417.27 | 8500 | 0 |
__________________________________________________________________
Answer: $77,417.27

S9-8
12. Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the
funds are discounted back at a rate of 14 percent, what is the present value of his future
pot of gold?

9-12. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 14 |CPT PV -249.92 | 0 | 175,000 |
__________________________________________________________________
Answer: $249.92

13. Polly Graham will receive $12,000 a year for the next 15 years as a result of her patent.
If a 9 percent rate is applied, should she be willing to sell out her future rights now
for $100,000?

9-13. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 15 | 9 |CPT PV- 96,728.26 | 12000 | 0 |
__________________________________________________________________
Answer: $96,728.26

Yes, the present value of the annuity is worth less than $100,000.
14. Carrie Tune will receive $19,500 for the next 20 years as a payment for a new song she has
written. If a 10 percent rate is applied, should she be willing to sell out her future rights
now for $160,000?

9-14. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 20 | 10 |CPT PV 166,014.49 | 19500 | 0 |
__________________________________________________________________

No, the present value of the annuity is worth more than $160,000.

15. The Clearinghouse Sweepstakes has just informed you that you have won $1 million. The
amount is to be paid out at the rate of $20,000 a year for the next 50 years. With a discount
rate of 10 percent, what is the present value of your winnings.
S9-9
9-15. Solution: Using Financial Calculator
__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 10 |CPT PV -198,286.29 | 20000 | 0 |
__________________________________________________________________
Answer: $1998,286.29
16. Joan Lucky won the $80 million lottery. She is to receive $1 million a year for the next 50
years plus an additional lump sum payment of $30 million after 50 years. The discount rate is 12
percent. What is the current value of her winnings?

9-16. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 50 | 12 |CPT PV -8,408,303.93| 1000000 | 31000000 |
__________________________________________________________________
Answer: $8,408,303.93

17. Al Rosen invests $25,000 in a mint condition 1952 Mickey Mantle Topps baseball card. He
expects the card to increase in value 12 percent per year for the next 10 years. How much
will his card be worth after 10 years?

9-17. Solution: Using Financial Calculator

________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 10 | 12 | 25,000 | 0 |CPT FV -77,646.21
________________________________________________________________
Answer: $77,646.21

S9-10
18. Dr. Ruth has been secretly depositing $2,500 in her savings account every December
starting in 1999. Her account earns 5 percent compounded annually. How much will she have in
December 2008? (Assume that a deposit is made in the year 2008.) Make sure to carefully count
the years.

9-18. Solution: Using Financial Calculator

________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 10 | 5 | 0 | 2,500 |CPT FV -31,222.73|
________________________________________________________________
Answer: $31,222.73
19. At a growth (interest) rate of 9 percent annually, how long will it take for a sum to double?
To triple? Select the year that is closest to the correct answer.

9-19. Solution: Using Financial Calculator

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
_____________________________________________________________
|CPT N 8.04 | 9 | 1 | 0 | -2 |
_____________________________________________________________
To double: 8.04 years
_____________________________________________________________
| N | I/Y | PV | PMT | FV |
_____________________________________________________________
|CPT N 12.75 | 9 | 1 | 0 | -3 |
_____________________________________________________________
To triple: 12.75 years

20. If you owe $40,000 payable at the end of seven years, what amount should your creditor
accept in payment immediately if she could earn 12 percent on her money?

9-20. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 7 | 12 |CPT PV -18,093.97 | 0 | 40,000 |
__________________________________________________________________
Answer: $18,093.97

S9-11
S9-12
21. Jack Hammer invests in a stock that will pay dividends of $2.00 at the end of the first year;
$2.20 at the end of the second year; and $2.40 at the end of the third year. Also, he believes
that at the end of the third year he will be able to sell the stock for $33. What is the present
value of all future benefits if a discount rate of 11 percent is applied? (Round all values to
two places to the right of the decimal point.)

9-21. Solution: Using Financial Calculator

____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 1 | 11 |CPT PV -1.80 | 0 | 2.00 |
____________________________________________________________
Answer: PV of Year 1 dividend $1.80

____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 2 | 11 |CPT PV -1.79 | 0 | 2.20 |
____________________________________________________________
Answer: PV of Year 2 dividend $1.79
____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 3 | 11 |CPT PV -1.75 | 0 | 2.40 |
____________________________________________________________
Answer: PV of Year 3 dividend $1.75
____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 3 | 11 |CPT PV -24.13| 0 | 33.00 |
____________________________________________________________
Answer: PV of the selling price $24.13

Total = 1.80 + 1.79 + 1.75 + 24.13 = 29.47

22. Les Moore retired as president of Goodman Snack Foods Company but is currently on a
consulting contract for $35,000 per year for the next 10 years.
a. If Mr. Moores opportunity cost (potential return) is 10 percent, what is the present
value of his consulting contract?
b. Assuming Mr. Moore will not retire for two more years and will not start to receive
his 10 payments until the end of the third year, what would be the value of his
deferred annuity?

S9-13
9-22. Solution: Using Financial Calculator
a._________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 10 | CPT PV -215,059.85 | 35,000 | 0 |
__________________________________________________________________
Answer: $215,059.85

b._________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 2 | 10 | CPT PV -177,735.41 | 0 | 215,059.85 |
__________________________________________________________________
Answer: $177,735.41

23. Juan Garza invested $20,000 10 years ago at 12 percent, compounded quarterly. How much
has he accumulated?

9-23. Solution: Using Financial Calculator

_________________________________________________________________
| N | I/Y | PV | PMT | FV |
_________________________________________________________________
| 40 | 3 | 20000 | 0 |CPT FV -65,240.76|
________________________________________________________________
Answer: $65,240.76
24. Determine the amount of money in a savings account at the end of five years, given an
initial deposit of $5,000 and a 12 percent annual interest rate when interest is compounded
(a) annually, (b) semiannually, and (c) quarterly.

9-24. Solution: Using Financial Calculator

a.________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 5 | 12 | 5000 | 0 |CPT FV -8,844.71|
________________________________________________________________
Answer: $8,811.71
b.________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 10 | 6 | 5000 | 0 |CPT FV -8,954.24|
________________________________________________________________
S9-14
Answer: $8,954.24

c.________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 20 | 3 | 5000 | 0 |CPT FV -9,030.56|
________________________________________________________________
Answer: $9,030.56
25. As stated in the chapter, annuity payments are assumed to come at the end of each payment
period (termed an ordinary annuity). However, an exception occurs when the annuity
payments come at the beginning of each period (termed an annuity due). To find the
present value of an annuity due, subtract 1 from n and add 1 to the tabular value. To find
the future value of an annuity, add 1 to n and subtract 1 from the tabular value. For
example, to find the future value of a $100 payment at the beginning of each period for five
periods at 10 percent, go to Appendix C for n = 6 and i = 10 percent. Look up the value of
7.716 and subtract 1 from it for an answer of 6.716 or $671.60 ($100 6.716).
What is the future value of a 10-year annuity of $4,000 per period where payments
come at the beginning of each period? The interest rate is 12 percent.

9-25. Solution: Using Financial Calculator

_________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 10 | 12 | 0 | 4000 |CPT FV -78,618.33|
________________________________________________________________
Answer: $78,618.33 (make sure to change annuity to beginning)

26. Related to the discussion in problem 25, what is the present value of a 10-year annuity of
$5,000 per period in which payments come at the beginning of each period? The interest
rate is 12 percent.

9-26. Solution: Using Financial Calculator

_________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 12 | CPT PV -177,735.41 | 5000 | 0 |
__________________________________________________________________
Answer: $31,641.25(make sure to change annuity to beginning)

27. Your rich godfather has offered you a choice of one of the three following alternatives:
$10,000 now; $2,000 a year for eight years; or $24,000 at the end of eight years. Assuming
you could earn 11 percent annually, which alternative should you choose? If you could earn
12 percent annually, would you still choose the same alternative?
S9-15
9-27. Solution: Using Financial Calculator
(first alternative) Present value of $10,000 received now: $10,000

(second alternative) Present value of annuity of $2,000 for eight years:

_________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 8 | 11 | CPT PV -10,292.25 | 2,000 | 0 |
__________________________________________________________________
Answer: $10,292.25

(third alternative) Present value of $24,000 received in eight years:

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 11 | CPT PV -10,414.24 | 0 | 24,000 |
__________________________________________________________________
Answer: $10,414.24

Select $24,000 to be received in eight years.

Revised answers based on 12%.
(first alternative) Present value of $10,000 received today: $10,000

(second alternative) Present value of annuity of $2,000 for 8 years:

_________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 8 | 12 | CPT PV -9,935.28 | 2,000 | 0 |
__________________________________________________________________
Answer: $9,935.28

(third alternative) Present value of $24,000 received in 8 years:

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 12 | CPT PV -9,693.20 | 0 | 24,000 |
__________________________________________________________________
Answer: $9,693.20

Select $10,000 now.

S9-16
28. You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent
long-term certificate of deposit (compounded annually). With the certificate of deposit, you
make an initial investment at the beginning of the first year.
a. What single payment could be made at the beginning of the first year to achieve this
objective?
b. What amount could you pay at the end of each year annually for 10 years to achieve
this same objective?

9-28. Solution: Using Financial Calculator

a. ________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 8 | CPT PV -13,408.06 | 0 | 28,947 |
__________________________________________________________________
Answer: $13,408.06

b. ________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 10 | 0 | CPT PMT 2,000.06 | 28,497 |
__________________________________________________________________
Answer: $2,000.06
29. Sue Sussman started a paper route on January 1, 2002. Every three months, she deposits
$500 in her bank account, which earns 4 percent annually but is compounded quarterly. On
December 31, 2005 she used the entire balance in her bank account to invest in a contract
that pays 9 percent annually. How much will she have on December 31, 2008?

9-29. Solution: Using Financial Calculator

_________________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________________
| 16 | 1 | 0 | 500 |CPT FV -8,628.93 |
________________________________________________________________
Answer: $8,628.93 December 31, 2005 amount

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 3 | 9 | 8628.93 | 0 |CPT FV -11,174.71 |
__________________________________________________________________
Answer: $8,628.93 December 31, 2008 amount
S9-17
30. On January 1, 2002, Mike Irwin, Jr., bought 100 shares of stock at $14 per share. On
December 31, 2008, he sold the stock for $21 per share. What is his annual rate of return?
Interpolate to find the exact answer.

9-30. Solution: Using Financial Calculator

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 7 |CPT I/Y 5.96 | 14 | 0 | -21 |
____________________________________________________________
Answer: 5.96%

31. Dr. I. N. Stein has just invested $6,250 for his son (age one). The money will be used for
his sons education 17 years from now. He calculates that he will need $50,000 for his sons
education by the time the boy goes to school. What rate of return will Dr. Stein need to
achieve this goal?

9-31. Solution: Using Financial Calculator

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 7 |CPT I/Y 13.01| -6250 | 0 | 50000 |
____________________________________________________________
Answer: 13.01%

32. Ester Seals has just given an insurance company $41,625. In return, she will receive an
annuity of $5,000 for 15 years. At what rate of return must the insurance company invest
this $41,625 to make the annual payments? Interpolate.

9-32. Solution: Using Financial Calculator

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 15 |CPT I/Y 8.46| -41625 | 5000 | 0 |
____________________________________________________________
Answer: 8.46%

33. Betty Bronson has just retired after 25 years with the electric company. Her total pension
funds have an accumulated value of $180,000, and her life expectancy is 15 more years.
Her pension fund manager assumes he can earn a 9 percent return on her assets. What will
be her yearly annuity for the next 15 years?

S9-18
9-33. Solution: Using Financial Calculator
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 15 | 9 | 180000 | CPT PMT -22330.60 | 0 |
__________________________________________________________________
Answer: $22,330.6

34. Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that
is expected to increase in value by 12 percent per year for the next five years. He will take the
proceeds and provide himself with a 10-year annuity. Assuming a 12 percent interest rate, how
much will this annuity be?

9-34. Solution: Using Financial Calculator

__________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 5 | 12 | 50000 | 0 |CPT FV -88,117.08 |
__________________________________________________________________
Answer: $88,117.08 After 5 years
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 12 | 88117.08 | CPT PMT -15595.33 | 0 |
__________________________________________________________________
Answer: $15,595.33 The annuity

35. You wish to retire after 18 years, at which time you want to have accumulated
enough money to receive an annuity of $14,000 a year for 20 years of retirement. During the
period before retirement you can earn 11 percent annually, while after retirement you can earn 8
percent on your money. What annual contributions to the retirement fund will allow you to
receive the $14,000 annually?

9-35. Solution: Using Financial Calculator

Determine the present value of a 20-year annuity during retirement:
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 20 | 8 | CPT PV -137454.06 | 14000 | 0 |
__________________________________________________________________
Answer: $137,454.06
S9-19
To determine the annual deposit into an account earning 11% that is
necessary to accumulate $137,454.06 after 18 years, solve for the
annuity:
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 18 | 11 | 137454.06| CPT PMT -2727.48 | 0 |
__________________________________________________________________
Answer: $2,727.48 annual contribution

36. Del Monty will receive the following payments at the end of the next three years: $2,000,
$3,500, and $4,500. Then from the end of the fourth through the end of the tenth year, he
will receive an annuity of $5,000 per year. At a discount rate of 9 percent, what is the
present value of all three future benefits?

9-36. Solution: Using Financial Calculator

First find the present value of the first three payments.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 1 | 9 | CPT PV -1,834.86 | 0 | 2000 |
__________________________________________________________________
Answer: $1,834.86

________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 2 | 9 | CPT PV -2,945.88 | 0 | 3500 |
__________________________________________________________________
Answer: $2,945.88

________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 3 | 9 | CPT PV -3,474.83 | 0 | 4500|
__________________________________________________________________
Answer: $3,474.83

Total = 1,834.86 + 2,945.88 + 3,474.83 = $8,255.57 as of now

S9-20
 Then find the present value of the deferred annuity.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 7 | 9 | CPT PV -25,164.76 | 5000 | 0 |
__________________________________________________________________
Answer: $25,164.76 as of the end of year 3.
Then find it PV as of now:
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 3 | 9 | CPT PV -19,431.81 | 0 | 25,164.76 |
_____________________________________________________________,_____
Answer: $25,164.76 as of now

Finally, find the total present value of all future payments.

8,255.57 + 19,431.81 = $27,687.38

Alternatively we could use the NPV keys by pressing and entering the
following:

Press the following keys 2nd, CF, 2nd, Clear

Calculator displays CFo, press Enter key
Press down arrow, enter 2000 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 3500 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 4500 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 5000 and press enter.
Press down arrow, enter 7 and press enter.
Press NPV; calculator shows I = 0; enter 9 and press enter
Press down arrow; calculator shows NPV = 0
Press CPT, calculator shows NPV = 27,687.38 which the present value
of these cash flows.

S9-21
37. Bridget Jones has a contract in which she will receive the following payments for the next
five years: $1,000, $2,000, $3,000, $4,000, and $5,000. She will then receive an annuity
of $8,500 a year from the end of the 6th through the end of the 15th year. The appropriate
discount rate is 14 percent. If she is offered $30,000 to cancel the contract, should she do it?

9-37. Solution: Using Financial Calculator

First find the present value of the first five payments.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 1 | 14 | CPT PV -877.19 | 0 | 1000 |
__________________________________________________________________
Answer: $877.19
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 2 | 14 | CPT PV -1538.94 | 0 | 2000 |
__________________________________________________________________
Answer: $1,538.94
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 3 | 14 | CPT PV -2024.91 | 0 | 3000 |
__________________________________________________________________
Answer: $2,024.91
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 4 | 14 | CPT PV -2368.32 | 0 | 4000 |
__________________________________________________________________
Answer: $2,368.32
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 5 | 14 | CPT PV -2596.84 | 0 | 5000 |
__________________________________________________________________
Answer: $2,596.84

Total = 877.19 + 1,538.94 + 2,024.91 + 2,368.32 + 2,596.84 = $9,406.20

S9-22
 Then find the present value of the deferred annuity.
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 14 | CPT PV -44336.98 | 8500 | 0 |
__________________________________________________________________
Answer: $44,336.98 as of the end of year 5.
Then find it PV as of now:
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 5 | 14 | CPT PV -23027.24 | 0 | 44336.98 |
_____________________________________________________________,_____
Answer: $23,027.24 as of now

Finally, find the total present value of all future payments.

9,406.20+ 23,027.24 = $32,433.44

Because this amount is greater than $30,000, Bridget should not cancel
her contract.
Alternatively we could use the NPV keys by pressing and entering the
following:

Press the following keys 2nd, CF, 2nd, CE Clear

Calculator displays CFo, press Enter key
Press down arrow, enter 1000 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 2000 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 3000 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 4000 and press enter.
Press down arrow, enter 1 and press enter.
Press down arrow, enter 5000 and press enter.
Press down arrow, enter 1 and press enter.
S9-23
Press down arrow, enter 8500 and press enter.
Press down arrow, enter 10 and press enter.
Press NPV; calculator shows I = 0; enter 14 and press enter
Press down arrow; calculator shows NPV = 0
Press CPT, calculator shows NPV = 32,433.45which the present value
of these cash flows.

Again, because this amount is greater than $30,000, Bridget should not
cancel her contract.

38. Mark Ventura has just purchased an annuity to begin payment at the end of 2011 (that is the
date of the first payment). Assume it is now the beginning of the year 2009. The annuity is
for $8,000 per year and is designed to last 10 years. If the interest rate for this problem
calculation is 13 percent, what is the most he should have paid for the annuity?

9-38. Solution: Using Financial Calculator

________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 10 | 10 | CPT PV -43409.95 | 8000 | 0 |
__________________________________________________________________
Answer: $43,409.95 as of the end of year 2.
Then find it PV as of now:
________________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________________
| 2 | 13 | CPT PV -33996.36 | 0 | 43409.95 |
_____________________________________________________________,_____
Answer: $33,996.36 as of now

The maximum that should be paid for the annuity is $33,996.36.

39. If you borrow $15,618 and are required to pay back the loan in seven equal annual
installments of $3,000, what is the interest rate associated with the loan?

9-39. Solution: Using Financial Calculator

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 7 |CPT I/Y 8.46| -15618 | 3000 | 0 |
S9-24
____________________________________________________________
Answer: 8.00%
40. Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent
interest. That is, in this particular case, the amount owed will go up by 10 percent per year
for five years. The lender then will require that Cal pay off the loan over the next 12 years
at 11 percent interest. What will his annual payment be?

9-40. Solution: Using Financial Calculator

___________________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________________
| 5 | 10 | 10000 | 0 | CPT FV 16105.10 |
_____________________________________________________________,_____
Answer: $16,105.10 Amount owed after 5 years
___________________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________________
| 12 | 11 | 16105.10 | CPT PMT -2480.62 | 0 |
_____________________________________________________________,_____
Answer: $2,480.62 Annual payment to retire the loan

41. If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year life
of the loan, what equal annual payments must be made to discharge the loan, plus pay the
bank its required rate of interest (round to the nearest dollar)? How much of his first
payment will be applied to interest? To principal? How much of his second payment will be
applied to each?

9-41. Solution: Using Financial Calculator

___________________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________________
| 7 | 10 | 60000 | CPT PMT -12,324.33 | 0 |
_____________________________________________________________,_____
Answer: $1,324.33 Annual payment to retire the loan

First payment:
$60,000 .10 = $6,000 interest
$12,324.33 $6,000 = $6,324.33 applied to principal

Second payment:

S9-25
 First determine remaining principal and then the interest and
principal payment.

$60,000 $6,324.33 = $53,675.67 remaining principal

$53,675.67 .10 = $ 5,367.57 interest
$12,325 $5,367.57 = $ 6,956.76 applied to principal

42. Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His
mortgage is for 25 years.
a. How much will his annual payments be? (Although home payments are usually on a
monthly basis, we shall do our analysis on an annual basis for ease of computation.
We will get a reasonably accurate answer.)
b. How much interest will he pay over the life of the loan?
c. How much should he be willing to pay to get out of a 14 percent mortgage and into a
10 percent mortgage with 25 years remaining on the mortgage? Assume current
interest rates are 10 percent. Carefully consider the time value of money. Disregard
taxes.

9-42. Solution: Using Financial Calculator

a._________________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________________
| 25 | 14 | 80000 | CPT PMT -11639.87 | 0 |
_____________________________________________________________,_____
Answer: $11,639.87
b.
Total payments = 11,639.87 X 25 = $290,996.82
Total interest paid = 290,996.82 80,000 = 210,996.82
c._________________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________________
| 25 | 10 | 80000 | CPT PMT -8813.45 | 0 |
_____________________________________________________________,_____
Answer: $8,813.45 annual payment at 10%

Difference between old and new payments = 11,639.87 8,813.45 =

$2,826.42

P.V. of difference at 10%:

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
S9-26
____________________________________________________________
| 25 | 10 | CPT PV -25655.57 | 2826.42 | 0 |
____________________________________________________________
Answer: $25,655.57 Amount that could be paid to refinance

43. You are chairperson of the investment fund for the Eastern Football League. You are asked
to set up a fund of semiannual payments to be compounded semiannually to accumulate a
sum of $100,000 after 10 years at an 8 percent annual rate (20 payments). The first
payment into the fund is to occur six months from today, and the last payment is to take
place at the end of the 10th year.
a. Determine how much the semiannual payment should be. (Round to whole numbers.)
On the day after the fourth payment is made (the beginning of the third year) the
interest rate will go up to a 10 percent annual rate, and you can earn a 10 percent annual
rate on funds that have been accumulated as well as all future payments into the fund.
Interest is to be compounded semiannually on all funds.
b. Determine how much the revised semiannual payments should be after this rate
change (there are 16 payments and compounding dates). The next payment will be in
the middle of the third year. (Round all values to whole numbers.)

9-43. Solution: Using Financial Calculator

a.
________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________
| 20 | 4 | 0 | CPT PV -3358.18 | 100000 |
________________________________________________________
Answer: $3,358

b. First determine how much the old payments are equal to after 4
periods at 4%.
___________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________
| 4 | 4 | 0 | 3358.18 | CPT FV -14260.37 |
___________________________________________________________
Answer: $14,260.37

Then determine how much this value will grow to after 16 periods at
5%. Appendix A.
___________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________

S9-27
| 16 | 5 | 14260.37 | 0 | CPT FV -31286.60 |
___________________________________________________________
Answer: $31,286.60

Subtract this value from $100,000 to determine how much you

need to accumulate on the next 16 payments.

100,000 31,286.60 = 68,871.40

Determine the revised semi-annual payment necessary to

accumulate this sum after 16 periods at 5%.

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 20 | 5 | 0 | CPT PV -2911.19 | 68,871.40 |
__________________________________________________________
Answer: $2,911.19 revised semi-annual payment

44. Your younger sister, Linda, will start college in five years. She has just informed your
parents that she wants to go to Hampton University, which will cost $17,000 per year for
four years (cost assumed to come at the end of each year). Anticipating Lindas ambitions,
your parents started investing $2,000 per year five years ago and will continue to do so for
five more years. How much more will your parents have to invest each year for the next
five years to have the necessary funds for Lindas education? Use 10 percent as the
appropriate interest rate throughout this problem (for discounting or compounding).

9-44. Solution: Using Financial Calculator

Present value of college costs
_____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 4 | 10 | CPT PV -53887.71 | 17000 | 0 |
____________________________________________________________
Answer: $53,887.71

Accumulation based on investing $2,000 per year for 10 years.

______________________________________________________
| N | I/Y | PV | PMT | FV |
______________________________________________________
| 10 | 10 | 0 | 2000 | CPT FV -31874.85 |
S9-28
______________________________________________________
Answer: $31,874.85

Additional funds required 5 years from now.

$53,887.71 PV of college costs

31,874.81 Accumulation based on $2,000 per year investment
$22,012.90 Additional funds required

Added contribution for the next 5 years

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
____________________________________________________________
| 5 | 10 | 0 | CPT PV -3605.66 | 22012.90 |
____________________________________________________________
Answer: $3,605.66
45. Linda (from problem 44) is now 18 years old (five years have passed), and she wants to get
married instead of going to school. Your parents have accumulated the necessary funds for
her education.
Instead of her schooling, your parents are paying $8,000 for her upcoming wedding and
plan to take year-end vacations costing $5,000 per year for the next three years.
How much money will your parents have at the end of three years to help you with
graduate school, which you will start then? You plan to work on a masters and perhaps a
PhD. If graduate school costs $14,045 per year, approximately how long will you be able to
stay in school based on these funds? Use 10 percent as the appropriate interest rate
throughout this problem.

9-45. Solution: Using Financial Calculator

Funds available after the wedding
$53,887.71
8,000.00 Wedding
$45,887.71 Funds available after the wedding

Less present value of vacation

_____________________________________________________________
| N | I/Y | PV | PMT | FV |
S9-29
____________________________________________________________
| 3 | 10 | CPT PV -12434.26 | 5000 | 0 |
____________________________________________________________
Answer: $12,434.26
$45,887.71
12,434.26
$33,453.45 Remaining funds for graduate school

Funds available 3 years later for graduate school:

________________________________________________________
| N | I/Y | PV | PMT | FV |
________________________________________________________
| 3 | 10 | 33453.45 | 0 | CPT FV -44526.54 |
________________________________________________________
Answer: $44,526.54

Number of years of graduate education

_____________________________________________
| N | I/Y | PV | PMT | FV |
_____________________________________________
| CPT N 4 | 10 | 44526.54 | 14045 | 0 |
_____________________________________________
Answer: 4 years

S9-30
COMPREHENSIVE PROBLEM
Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he had
received from drug companies for his latest discovery, a unique electronic stimulator that reduces
the pain from arthritis. The process had yet to pass rigorous Federal Drug Administration (FDA)
testing and was still in the early stages of development, but the interest was intense. He received
the three offers described below this paragraph. (A 10 percent interest rate should be used
throughout this analysis unless otherwise specified.)
Offer I $1,000,000 now plus $200,000 from year 6 through 15. Also if the product did over $100
million in cumulative sales by the end of year 15, he would receive an additional $3,000,000. Dr.
Wolf thought there was a 70 percent probability this would happen.
Offer II Thirty percent of the buyers gross profit on the product for the next four years. The
buyer in this case was Zbay Pharmaceutical. Zbays gross profit margin was 60 percent. Sales in
year one were projected to be $2 million and then expected to grow by 40 percent per year.
Offer III A trust fund would be set up for the next 8 years. At the end of that period, Dr. Wolf
would receive the proceeds (and discount them back to the present at 10 percent). The trust fund
called for semiannual payments for the next 8 years of $200,000 (a total of $400,000 per year).
The payments would start immediately. Since the payments are coming at the beginning of
each period instead of the end, this is an annuity due. To look up the future value of an annuity
due in the tables, add 1 to n (16 + 1) and subtract 1 from the value in the table. Assume the
annual interest rate on this annuity is 10 percent annually (5 percent semiannually). Determine
the present value of the trust funds final value.
Required: Find the present value of each of the three offers and indicate which one has the
highest present value.

CP 9-1. Solution: Using Financial Calculator

Medical Research Corporation
Offer I
$1,000,000 now plus:
+ $200,000 from year 6 through 15 (deferred annuity)
___________________________________________________________
| N | I/Y | PV | PMT | FV |
___________________________________________________________
| 10 | 10 | CPT PV -1228913.42 | 200000 | 0 |
___________________________________________________________

Answer: $1,228.913.42 Beginning of year 6 i.e. end of year 5.

S9-31
_____________________________________________________________
| N | I/Y | PV | PMT | FV |
_____________________________________________________________
| 5 | 10 | CPT PV -763058.55 | 0 | 1228913.42 |
_____________________________________________________________

Answer: $763,058.55 Now.

+ the PV of .70 $3,000,000 = $2,100,000 to be received

after 15 years.

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 15 | 10 | CPT PV -502723.30 | 0 | 2100000 |
__________________________________________________________

Answer: $502,723.30.

Total value of Offer I

$1,000,000.00 Payment today

763,058.55 Present value of deferred annuity
502,723.30 Present value of $3 million bonus
$2,265,781.85 Total Value of Offer I

Offer II
Gross Profit Payment 30%
Year Sales (60% of Sales) of Gross Profit
1 $2,000,000 $1,200,000 $360,000
2 2,800,000 1,680,000 504,000
3 3,920,000 2,352,000 705,600
4 5,488,000 3,292,800 987,840

S9-32
__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 1 | 10 | CPT PV -327272.73 | 0 | 360000 |
__________________________________________________________

Answer: $327,272.73 Year 1 Payment

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 2 | 10 | CPT PV -416528.93 | 0 | 504000 |
__________________________________________________________

Answer: $416,528.93 Year 2 Payment

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 3 | 10 | CPT PV -530127.72 | 0 | 705600 |
__________________________________________________________

Answer: $530,127.72 Year 3 Payment

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 3 | 10 | CPT PV -674708.01 | 0 | 987840 |
__________________________________________________________

Answer: $674,708.01 Year 4 Payment

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 3 | 10 | CPT PV -530127.72 | 0 | 705600 |
__________________________________________________________

Answer: $530,127.72

S9-33
 Year PV of Payment
1 $327,272.73
2 416,528.93
3 530,127.72
4 674,708.01
$1,948.637.39 Total value of Offer II

Offer III
Future value of an annuity due

__________________________________________________________
| N | I/Y | PV | PMT | FV |
__________________________________________________________
| 16 | 5 | 0 | 200000 | CPT FV -4968073.27 |
_________________________________________________________
Answer: $4,968,073.27 Value of the trust after 8 years
_____________________________________________________________
| N | I/Y | PV | PMT | FV |
_____________________________________________________________
| 8 | 10 | CPT PV -2317642.85 | 0 | 4968073.27 |
_____________________________________________________________

Answer: $2,317,642.85 Total Value of Offer III

Summary
Value of Offer I $2,265,781.85
Value of Offer II $1,948.637.39
Value of Offer III $2,317,642.85

Select Offer III

S9-34