DISCOUNTED CASH FLOW VALUATION

1 What is the present value of $200 in one year ,$400 the next year ,$600 the next year and
$800 the last year if the discount rate is 12 %

1
YEAR CF PV
1 200 $178.57
2 400 $318.88
3 600 $427.07
4 800 $508.41

$1,432.93

2 What is the present value of $500 per year for 3 years if the discount rate is 10 per cent

SOLU PMT 500

RATE 0.1
NPER 3

PRESENT VALUE ANNUITY

$1,243.43

3 What is the annuity payment if the present value is $100,000, the interest rate is 18 per
cent and there are 5 periods

SOLUTION
3 PV 100000
NPER 5
RATE 0.18
PMT $31,977.78

4 An investment offers $5300 per year for 15 years, with the first payment occurring one
year from now. If the required return is 7 per cent , what is the value of the investment
?What would be the value if the payments occurred for 40 years ? For 75 years? Forever
SOLUTION PMT 5300
RATE 0.07
NPER 15 40
 PV@15YRS $48,271.94
PV@40YRS $70,658.06
PV@75YRS $75,240.70

TO FIND THE VALUE OF A PERPETUITY WE USE THE EQUATION :

PV=C/R
PV=5300/0.07

NOTICE THAT AS THE LENGTH OF THE ANNUITY PAYMENTS INCREASES, THE PRESEN
VALUE OF THE PERPEUITY .THE PRESENT VALUE OF THE 75YEAR ANNUITY AND THE P
$473.58

5 If you put up $34,000 today in exchange for a 7.65 percent, 15 year annuity what will be
the annual cash flow be?

SOLUTION

PVA 34000
RATE 0.0765
NPER 15
ANNUITY $3,887.72

6 If you deposit$4000 at the end of each of the next20 years into an account paying 11.2
per cent interest, how much money will you have in the account in 20 years? How much
will you have if you make deposits for 40 years

6 ANNUITY 4000
NPER 20 40
RATE 0.112
FVA $262,781.16
FVA $2,459,072.63

7 The Maybe Pay Life Insurance Co is trying to sell you an investment policy that will pay
you and your heirs $25,000 per year forever. If the required return on this investment is
7.2 per cent how much will you pay for the policy

7 C 25000
 R 7.20%
PV 347222.22222222

8 Calculating and Comparing Effective Annual Rates

BankA:15percentcompoundeddaily
Bank B : 15.5 per cent compounded quarterly
Bank C : 16 per cent compounded annually
Which of these is the best if you are thinking of opening a savings account

8 BANK C IS OFFERING 16 PER CENT PER YEAR.SINCE THERE IS NO COMPOUNDING DU

BANK B IS COMPOUNDING QUARTERLY
EAR(B)= [1+(APR/M)]^M-1
[1+(0.155/4)^4 -1
EAR (B)

BANK A IS COMPOUNDING DAILY

EAR(A)=[1+(APR/M)]^M-1
[1+(0.15/365)]^M-1

BEST OFFER IS BY BANK B

9 A bank is offering 12 per cent compounded quarterly .If you put $100 in an accoun
much will you have at the end of one year? What is the EAR? How much will you h
at the end of two years

SOL THE BANK IS OFFERING 12%/4=3% EVERY QUARTER

IF YOU INVEST $100 FOR FOUR PERIOD AT 3 PER CENT PER PERIOD , THE FUTURE V
One Year FV=100*1.03^4 112.550881
Two Year FV=100*1.03^8 126.6770081388

EAR 0.12550881
12.55%

10 Depending on the issuer, a typical credit card agreement quotes an interest rate of
percent APR. Monthly payments are required .What is the actual interest rate you
such a credit card

SOL EAR [1+(0.18/12))^12-1

0.1956181715
19.56%
 11 Find the EAR in each of the following cases
Number of
Effective Rate
Stated APR Times
(EAR)
Compounded
8% Quarterly
16 Monthly
12 Daily
15 Infinite

11 STATED APR NO OF TIMES COMPOUNDED

8% QUARTERLY
16% MONTHLY
12% DAILY
15% INFINITE

12 You are ready to buy a house, and you have $20,000 for a down payment and closi
costs. Closing costs are estimated to be 4% of the loan value. You have an annual s
of $36,000, and the bank is willing to allow your monthly mortgage payment to be
to 28% of your monthly income. The interest rate on the loan is 6% per year with
monthly compounding (.5% per month) for a 30-year fixed rate loan. How much m
will the bank loan you? How much can you offer for the house

SOLUTION

BANK LOAN

MONTHLY INCOME 36000/12

MAXIMUM PAYMENT 0.28*3000

PV OF THE LOAN

ANNUITY 840
RATE 0.005
NPER 360
PV $140,104.96

CLOSING COST =0.04*140104.96

 DOWN PAYMENT 20000-5604
14396
TOTAL PRICE
$154,500.76

13 You need a 30 year ,fixed rate mortgage to buy a new home for $240,000.Your mortg

S0LUTION
THE AMOUNT OF PRINCIPAL PAID ON THE LOAN IS THE PV OF THE MONTHLY PAYME
THE PV OF THE $1150 MONTHLY PAYMENT IS

PVA ???
ANNUITY 1150
RATE 0.0052916667
NPER 360
PVA $184,817.42
THE MONTHLY PAYMENTS OF $1150 WILL AMOUNT TO A PRINCIPAL PAYMENT OF $1

THE AMOUNT OF BALANCE OF PRINCIPAL TO BE PAID

240000-184817.42 55182.58

THIS REMAINING PRINCIPAL AMOUNT WILL INCREASE AT THE INTEREST RATE ON TH

SO THE BALLOON PAYMENT IN 30 YEARS WHICH IS THE FV OF THE REMAINING PRIN

PV 55182.58
RATE 0.0052916667
NPER 360
FV $368,936.57

14 Prepare an amortization schedule for a five year loan of $42,000.The interest rate i
percent per year and the loan calls for equal annual payments. How much interest
in the third year? How much total interest is paid over the life of the loan?

SOLUTION
THE PAYMENT FOR THE LOAN REPAID WITH EQUAL PAYMENT IS THE ANNUITY PAYM
ANNUITY SO THE LOAN PAYMENT
 PV 42000
NPER 5
RATE 0.08
ANNUITY $10,519.17

AMORTIZATION TABLE

YEAR BEGIN BALANCE TOTAL PAYMENT

1 42000 10519.17
2 34840.83 10519.17
3 27108.9264 10519.17
4 18758.47 10519.17
5 9739.98 10519.17

IN THE THIRD YEAR 2168.71 OF INTEREST WAS PAID

TOTAL INTEREST OVER THE LIFE OF THE LOAN

15 Rework the above problem assuming that the loan agreement calls for a principal
reduction of $8400 every year instead of equal annual payments

SOLUTION
YEAR BEGIN BALANCE INTEREST PAYMENT
1 42000 3360
2 33600 2688
3 25200 2016
4 16800 1344
5 8400 672
e next year ,$600 the next year and

RATE 0.12

if the discount rate is 10 per cent

00,000, the interest rate is 18 per

the first payment occurring one

hat is the value of the investment
r 40 years ? For 75 years? Forever

75
 SE THE EQUATION :

75714.2857142857

UITY PAYMENTS INCREASES, THE PRESENT VALUE OF THE ANNUITY APPROACHES THE PRESENT
LUE OF THE 75YEAR ANNUITY AND THE PRESENT VALUE OF THE PERPEUITY IMPLY THAT THE VALUE TODAY OF ALL PERPETUITY PAYMENTS

ear annuity what will be

an account paying 11.2

in 20 years? How much

ent policy that will pay

rn on this investment is
oundeddaily

ng a savings account

R.SINCE THERE IS NO COMPOUNDING DURING THE YEAR,THIS IS THE EFFECTIVE YEAR

APR=15.5%
0.1642443719
16.42%

APR=15%

0.1617984431
16.18%

quarterly .If you put $100 in an account, how

What is the EAR? How much will you have

3 PER CENT PER PERIOD , THE FUTURE VALUE

rd agreement quotes an interest rate of 18

ed .What is the actual interest rate you pay on
ES COMPOUNDED EFFECTIVE RATE (EAR)
0.082432 8.24%
0.172271 17.23%
0.127475 12.75%
0.161834 16.18%

e $20,000 for a down payment and closing

of the loan value. You have an annual salary
your monthly mortgage payment to be equal
st rate on the loan is 6% per year with
a 30-year fixed rate loan. How much money
offer for the house

3000
840

5604
buy a new home for $240,000.Your mortgage bank will lend you the money at a 6.35 per cent APR for this 360 month loan. However you ca

OAN IS THE PV OF THE MONTHLY PAYMENTS YOU MAKE

MOUNT TO A PRINCIPAL PAYMENT OF $184817.42

INCREASE AT THE INTEREST RATE ON THE LOAN UNTIL THE END OF THE LOAN PERIOD
HICH IS THE FV OF THE REMAINING PRINCIPAL

year loan of $42,000.The interest rate is 8

al annual payments. How much interest is paid
s paid over the life of the loan?

EQUAL PAYMENT IS THE ANNUITY PAYMENT WITH THE LOAN VALUE AS THE PV OF THE
 INTEREST PRINCIPAL PAYMENT ENDING BALANCE
3360 7159.17 34840.83
2787.27 7731.90 27108.93
2168.71 8350.46 18758.5
1500.68 9018.49 9739.98
779.20 9739.97 0.0

F INTEREST WAS PAID

E OF THE LOAN
10595.86
he loan agreement calls for a principal
qual annual payments

PRINCIPAL PAYMENT TOTAL PAYMENT ENDING BALANCE

8400 11760 33600
8400 11088 25200
8400 10416 16800
8400 9744 8400
8400 9072 0
PERPETUITY PAYMENTS BEYOND 75 YEARS IS ONLY
th loan. However you can afford monthly payments of only $1150 ,so you offer to pay off any remaining loan balance at the end of the loan
an balance at the end of the loan in the form of single balloon payment. How large will this balloon payment have to be for you to keep yo
nt have to be for you to keep your monthly payments at $1150?