Financial Analysis Spreadsheet Templates

MAIN MENU -- CHAPTER 4

Problem 4-32 Problem 4-36 Problem 4-37

Corporate Finance by Ross, Westerfield, and Jaffe -- Seventh Edition

Copyright © 2005 Irwin/McGraw-Hill and KMT Software, Inc. (www.kmt.com)

File: 52097572.xls Copyright © 2005 Irwin/McGraw-Hill Printed: 02/22/2011

 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 4-32 Objective

Calculating the rate of interest from an annuity.

Student Name:
Course Name:
Student ID:
Course Number:

You are offered the opportunity to buy a note for $12,800. The note is certain to pay $2,000 at the end of each
of the next 10 years. If you buy the note, what rate of interest will you receive.

Solution
Problem 4-32
Instructions
Use the Excel RATE function to calculate the rate of interest that you would earn on the annuity.

Cost of note $12,800

Annuity payment $2,000
Term of annuity 10 years
Annual rate of return FORMULA

Copyright © 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 4-32
 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 4-36 Objective

Calculating an annuity amount to accumulate a future amount.

Student Name:
Course Name:
Student ID:
Course Number:

You are saving for the college education of two of your children. They are two years apart in age; one will begin
college in 15 years, the other will begin in 17 years. You estimate your children's college expenses to be
$21,000 per year per child. The annual interest rate is 15 percent. How much money must you deposit
in an account each year to fund your children's education? You will begin payments one year from today.
You will make your last deposit when your oldest child enters college.

Solution
Problem 4-36
Instructions
Using the assumptions below, calculate the present value of 4 years of college using the Excel PV function.
The present value of 4 years of college education represents the present value of college education when
each child starts college. The template will calculate the present value of college education for both
children. Then, using the Excel PV function, calculate the annual (equal) deposit needed for 15 years.

Assumptions
Annual interest rate 15%
Years till oldest enters college 15
Annual cost of college (today's Dollars) $21,000

Present value of 4 years of college FORMULA

Present value of college education for both children #VALUE!

Annual deposit needed for the next 15 years FORMULA

Copyright © 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 4-36
 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 4-37 Objective

Evaluate the attractiveness of an investment.

Student Name:
Course Name:
Student ID:
Course Number:

A well-known insurance company offers a policy known as the "Estate Creator Six Pay". Typically the
policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as
follows: The purchaser (say, the parent) makes the following six payments to the insurance company.

First birthday $750 Fourth birthday $800

Second birthday $750 Fifth birthday $800
Third birthday $750 Sixth birthday $800

No more payments are made after the child's sixth birthday. When the child reaches age 65, he or she
receives $250,000. If the relevant interest rate is 6 percent for the first six years and 7 percent for all
subsequent years, is the policy worth buying?

Solution
Problem 4-37
Instructions
Calculate the net present value of the policy using the PV function.

Present value of the first three payments FORMULA ( First birthday through the third)
Present value of the last three payments FORMULA ( fourth birthday through the sixth)
Present value of age 65 payment $3,254.33
Net present value of the policy FORMULA

Is the policy worth buying?

Copyright © 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 4-37