CHAPTER 3

3-6.
Investment A: $2,750 (1.06)15 = $6,590.54
Investment B:
$900 (1.09)5 =
$1,000 (1.09)4 =
$1,200 (1.09)3 =
$1,500 (1.09)2 =
$1,800 (1.09)1 =

$1,384.76
$1,411.58
$1,554.03
$1,782.15
$1,962.00
$8,094.52

Investment C: $1,200 [(1.10)10 1)/0.10] = $19,124.91

Investment D: $19,124.91 1.10 = $21,037.40

3-7.
a. FV on original retirement date if early retirement is chosen:
$500,000 (1.10)5 = $805,255
FV on retirement date if early retirement is not chosen:
$150,000 (1.10)4 = $219,615
150,000 (1.10)3 = 199,650
125,000 (1.10)2 = 151,250
125,000 (1.10)1 = 137,500
100,000 (1.10)0 = 100,000
$808,015
Robert Williams should not retire early because the future value of his
cash flows at the end of five years is about $3,000 greater for the planned
retirement date than for selling his practice and retiring now.
b. It would likely change the recommendation given that Robert will only
receive about $3,000 more and have to work an additional five years.
Clearly, five years of work should return more than an additional
$3,000.

3-17.
PV of Landon entering the draft:
Signing bonus
Initial = $3,000,
contra
000
ct
Subs = $5,00
0,000
eque
nt
contr
act
PV

10.])1
0.1(1[
7
=

$ 1,000,000
10.])10 = 11,37
.1(1[5
2,360

(1.1 = 15,
0)-5
114
,52
5
$27,486,885

PV of Landon playing out his eligibility:

Signin = $2,000,

(1.10 =
$
g
000
)-2
1,652,
bonus
893
Initia = $5,00
10.])10. (1.1 = 15,66
l
0,000
1(1[5
0)-2
4,408
contr

act
Subs = $6,00
10.])10. (1.1 = 11,67
eque
0,000
1(1[5
0)-7
1,638
nt

contr
act
PV
=
$28,988,939
Since the PV of playing out his eligibility and then entering the
draft is higher, Landon should stay in college.

3-20.
a.

End of
Amount
year (t)
Needed
1
$5,000

4,000

6,000

(1 +
= Present
.08)-t
Value
.9259
= $4,630
26
.8573
= 3,429
39
.7938
= 4,763

10,000

3,000

32
.7350
30
.6805
83

7,350

2,042

$22,214
An initial deposit of $22,214 would be needed to cover the
bills anticipated in each of the next five years.
b. An increase in the earnings rate would reduce the amount
calculated in part a.

3-28.
a Nomina
Compounding
Effective Annual
.
l Rate
Rate
6.10%
Annual
6.10%
5.90% Semiannu %99.512059.012=
al
+
5.85% Monthly %01.61120585.112=
+
The annually compounded rate of 6.10% is also the
highest effective rate.
b. He would prefer the monthly compounding case because it
offers a slightly higher effective annual rate of interest.

3-29.
PV of debt obligation = $10,000,000 (1.005)-24 = $8,871,857
Funds remaining for stock repurchase = $25,000,000 $8,871,857 =
$16,128,143