Assignment: Time Value of Money Answer Key

Q1
a. The cash flows are a 31-year annuity where the first payment is received today. Remember to
use the after-tax cash flows
Ans: $1,201,180.55
b. This option pays $446,000, after-tax, immediately. The remaining money is received as a 30year annuity that pays $101,055, annually before tax. Find the PV of the annuity, on an after tax
basis using the appropriate discount rate.
Ans: PV Annuity + 446,000 = $1,131,898.53
Choose option 1 as it has a higher PV than option 2
Q2
Use growing annuity formula for salary
PV(salary) = $368,894.18
The yearly bonus are = 10% of his salary. Since his salary grows at 4%, bonus will grow by the
same amount
PV(Bonus) = $36,889.42
PV(Signing) = $10,000
PV(Offer) = PV(Salary) + PV(Bonus) + PV(Signing) = $415,783.60
Q3
Note that this is a numerical with annual payments
a. You have 18 years remaining so compute the PV
PV = 12993.12
b. You have 10 years remaining so compute the PV appropriately
PV = 8832.10
c. If you decide to pay off the mortgage immediately before the 12th payment, you will have to
pay exactly what you paid in part (a) plus the 12th payment: 12993.12 + 1200 = 14193.12
Q4
The firm needs 5 lakhs in 11years time (this is the FV of the 11 year annuity)
Use the appropriate formula to determine the equal yearly payments to be Rs. 24207.70
Q5
rmonthly = rannual /12 = 0.10/12 = 0.0083 = 0.83%
The present value of the payments to Kangaroo Autos is: $8938
A car from Turtle Motors costs $9,000 cash. Therefore, Kangaroo Autos offers the better deal,
i.e., the lower present value of cost.

Q6
a. Compute the annuity PV = $430,925.89
b. The annually compounded rate is 5.5%, so the semiannual rate is:
(1.055)(1/2) 1 = 0.0271 = 2.71%
Since the payments now arrive six months earlier than previously:
PV = $430,925.89 1.0271 = $442,603.98

Q7
a. Use perpetuity to compute PV = $16.667 mil
b. Use annuity to compute PV = 14.939 mil
c. Use growing perpetuity PV = $22.222 mil
d. Use growing annuity PV = 18,061 mil

Q8
You need to find the rate for an annuity given the other variables. Note that the payment is
monthly, so you are initially finding the monthly rate
Amount borrowed = $2,320,000 = PV of the annuity
Using your calculator by iteration compute r = 0.560%
The APR is = 6.72%
And the EAR is = (1 + .00560)12 1 = .0693 or 6.93%