Questions and answers CH 5

1. In how many years will an annuity of $100 grow to $100,000, if the annual rate of interest
is 10 percent?

Answer: According to expression (5.4), k = .10, F = 100,000, A = 100. Therefore,

n
ln(.1) +ln
100, 000
100
+
1
1.1

ln(1.1)

2.3026+6.9087
0.0953
48.3326 years

Financial calculator gives 48.4221 years. Remark: PMT=-100 FV=100,000
2. You deposit $40,000 to your account with the stipulation that you can withdraw $12,000 at
the end of each year. In how many years will the account be depleted (assume k = .10)?
First, check whether the inequality specified in equation (5.6) is satisfied. Substituting, we have 1-
40,000x0.10/12000=.6666>0, hence we can use the formula 5.5:




3. Consider question 2 above, but this time withdrawals are $3,999

Equation 5.6: 1-40,000x0.10/3999=-0.0003<0, hence the account will never be depleted and
$3999 can be withdrawn forever.


4. How much is the cost of a mortgage with an interest rate of 5% for 30 years with annual
payments of $16,263?
We need to find the PV of all the payments (annuity), that is PVA from 5.2:


PVA
e
A
1 1+k
( )
n
k

16, 263
1 1+0.05
( )
30
0.05

16, 263x(1 0.2314) / 0.05 249, 994.8360

5. Refer to question 4, what is the future value of the mortgage at the end of the 30th year?
That is how much would you have at the end of the 30th year if you have invested
payments of $16,263 every year for 30 years with an interest rate of %5?

( )
(

+
=
k
k
A FVA
n
1 1
=16, 263
1+0.05
( )
30
1
0.05

16, 263x(4.3219 1) / 0.05 $1, 080, 494.977

n
ln(.66)
ln(1.1)
0.4155/ .0953 4.3595years.


6. Refer to question 4, what is the present value of the amount you found?
Since it is the value that would be received 30 years later, we need to discount it to find the
present value. See Ch 4:
1,080,494.977/(1+k)
30
=250,002.1711
This is not surprising, sine the PV of all these payments were found in question 4 as
249,9948360 which only differs due to rounding, hence the values are the same.