82. INTEREST AND EQUIVALENCE PROBLEMS 3a In your own words explain the stme wale of money From your own lie (either now or in a situation that might cccur in your future), provide an example in \whtich the time value of maney would be important Magdalen, Miriam, and Mary June were asked to eon sider two different cash flows: $500 that they could receive today and $1000 that would be received 3 years from today. Magdalen wanted the $500 dollars ‘today, Miriam chose to collect $1000 in 3 years, and “Mary Tune was indifferent between these two options. Can you offer an explanation of the choice made by each woman? ‘A. woman borrowed $2000 and agreed to repa the end of 3 years, together with 10% simple interest per year. How much will she pay 3 years hence? ‘8 $5000 loan was to be repaid with 8% simple anal interest. A total of $5350 was paid, How long was the Solve the diagram below for the unknown Q assura- ing 9 10% interes (Answer: @ = $136.60) ‘The following series of payments will repay a present sum of $5000 at an 8% interest rate. Using single payment factors, what present sum is equivaleat 10 ‘his series of payments at a 10% interest rate? End-of-Year Payment the bank at the end of 3 years? (Answer: $945) 38 ‘What sum of money now is equivalent ro $8250 0¥0 ars he terest is 4% per 6-mionth period? (Answers $7052) ‘The local bank offers to pay 5% intetest on savings deposits. In anearby town, the bank pays 1.2% per 3- ‘month period (quarterly). A man who has $300.0 put in a savings account wonders whether the inreased interest paid in the neasby town ju i car there to make the deposit. As all money in the accoune for 2 years, how much acgi- tional interest would he obtain from the ‘bank over te local bank? ately bow many years? (Ansiver: 17% years) ‘The Apex Company sold a water softener to Marty ‘Smith, The price of the unit was $350. Marty asked fora deferred payment plan, and a contract was writ ten. Under the contract, the buyer could delay paying for the water softener if he purchased the coarse salt for recharging the softener from Apex. Atthe end of 2 years, the buyer was 19 pay for the mic in a lump arate of 1.5% per quaex-yew, ifthe customer ceased buy time prior 10 2 years, the matically become due. ‘Six months later, Many decided to buy salt else “Apex asked fordhe full payme dlue 18 months hence. Marty was unhappy about s0 Apex offered as an allemtive to accept the $350 swith interest at 10% per semiannval period for the ‘months that Marty iad been buying salt from Apex. Which of these alternatives should Marty accept? Explain ‘The United States recently purchased 30-year zero-coupon bonds from a sirugeling Foreign nation, ‘The bonds yield 4:4 per year interest ‘The zero-coupon bonds pay no interest during their De sad, was a mul sn dolar gift to the foreigncountry without the approval of Congress. Assumi- ing the senator's math is correct. bow Al the bonds st 442% instead of 5¥%% at the end of 30 years? One thousand dollars is borrowed forone yearatanin- terest rate of 1% per month. Ifthe same sum of money could be borrowed for the same period at an interest sate of 12% per year, iow much could be saved in interest charges? A sum of money Q will bereceived 6 years from now. ‘At 5% annual the present worth now of @ is $60. At the ferest rate, what would be the valve of Q in 10 ye: In 1995 an anonymous private collector purchased a xe depicts Picasso's friend ‘The painting was done in 1903 and valued then at 3600. If the painting was owned by the same fame ily until its sale in 1995, what rate of return did they receive on the $600 investment? (@) If $100 at Time “0” will be worth $110 a year rence and was $90.2 year ago, compute the intet= estate forthe past year and the interest rate next yea. (H) Assure that $90 invested 9-year ago will storm $110 a year from now. What is the annnal interest rae in this situation? How much must you invest now at 7.9% imerest 10 accumulate $175,000 in 63 years? 348 Problems 83 We know that a certain piece of equipment will cost $150,000 in 5 years, How much cost today using 10% interest? ‘The local garbage company charges $6 a month for lection, It had been their practice to send omers at the end of he end of February it send abill each customer for $12 for garbage sends out the 2-mionth bills af has been performed. Bills for January-February, for ‘example, are sent out at the end of January. The local ‘newspaper points out that the firm is receiving half its money before the garbage collection, This uneacned. ‘money, the newspaper says, could be temporarily in- vested for one month at 1% pec month interest by the garbage company to earn extra income, Compute how much extra income the garhage company could earn each year if'it invests the money as described by the newspaper. (Answer: $36,000) Stanford is buying an automobile that costs $12,000. She will pay $2000 immediately ane the re- ‘maining $10,000 in four anneal end-of-year principal payments of $2500 each. In addition to she $2500, ust pay 15¢ interest on the unpaid balance oF the loan each year. Prepare a cash flow table to represent this situation.