Author: Joyce Buda


Problem Assignment: Time Value of Money
Use Excel Functions to correctly calculate answers to all problems below
Explain in words what the answers mean
In problems with an A and B part, explain what you learn from the difference
For this problem set, we are not going to give you the exact answer but a range within which the correct answer can be found.  For example, if the problem was “How much is 20 plus 50?” we would say, “The correct answer is between 65 and 75” and you would need to specify the exact answer of “70.”

If you deposit $15,000 today in a Certificate of Deposit and earn 1% annual interest, how much will you have in 8 years? 

Melanie will receive a graduation gift of $7,000 from her parents in 4 years. If the discount rate is 3%, what is the gift worth today?

June received a life insurance payout from her grandmother in the form of an annuity.  She will get $15,000 per year for the next 30 years.  How much is that worth today if the current long term interest rate is 2.2%?  This is an ordinary annuity.

If Interest rates rise to 6%, what will be the value today of the annuity in 3 a?

Vinod deposits $3,000 into an IRA account that invests in long term U S Treasury Bonds.  Current Interest rates for the 20 year bond are 2.25%.  How long will it take to double Vinod's money? 

The Woods have $50,000 to use as a down-payment on a house, and they want to borrow $250,000 to buy a house for $300,000.  The current annual mortgage interest rate is 3%.  What will their monthly payment be for a 30 year loan that has equal monthly payments.  They will owe zero at the end of the mortgage. 

Mrs. Woods sees an advertisement for a 15 year loan at a rate of 2.5%.  What would be the mortgage payment if they borrow $250,000 at this lower interest rate?

Kim paid $400 per month into her 401K retirement plan. After 30 years, she had accumulated $500,000. What average annual rate of interest had he earned over the 30 years? 

For the year that ended in January 2000, Wal-Mart had revenues of $165 billion.  For the year ended in January 2015, it had revenues of $485 billion.  What has been the average compound growth rate?

Bola has accumulated $50,000 in her thrift savings plan at her job at the Federal Aviation Administration.  The government puts in 1% of her pay and matches up to another 4% if she puts in 5% out of her pay.  Bola earns $90,000 a year and plans to add 5% from her income plus the agency 5% for a total of $9,000 per year. 

Bola's friend Marshall heard a speech by John C. (Jack) Bogle, founder of The Vanguard Group of Mutual  Funds, one of the lowest cost and most successful group of funds.  Jack said that with the increasing need to reduce carbon emissions, it is unlikely that long term stock returns can exceed 6% per year.  Steps to reduce carbon will likely reduce prospects for economic growth in Mr. Bogle's opinion.  How much will Deniece have if Jack Bogle is correct and the earnings will be 6% per year compounded annually?

Christina hopes to open a Deli in 2015.  The initial  investment will be $85,000.  She expects that  that the Deli will generate the positive cash flow as indicated below.  If she can borrow money at 7% per year, what will  be the  Net Present Value?  Use 7% as the discount rate.

The information below is for the following problems, numbered from 10a through 10f.
James and Corrine are considering what to do about purchasing a new car.  They want to acquire a new 2016 Toyota Highlander .  The dealer quotes a price of $35,000 with the options they want. 
They have some choices. 
(Infomration for Problem 10-a)  With a payment of $4,300, they can lease the car for 3 years at $324 per month.  At the end they have the option to purchase the car for $25,000.
(Information for Problems 10-b and 10-c)  If they decide to buy, they have the option of a zero interest loan for 3 years, or $4,000 off the purchase price and a 5 year loan with an interest rate of 6%.
In both cases, the cost of sales tax and license tags total $2,500.  
They plan to keep the car for 12 years.  Which option has the lowest present value cost?  They decided to use 6% as the discount rate.

Convert the annual discount rate to a monthly rate and find the present Value of the lease option 

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