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**University of Auckland Executive Programmes ___________________________________________
**

Accounting and Finance for Graduate Diploma in Business

MODULE 1 – Practice examples

The Arithmetic of Finance

Optional reference: Chapter 14 of the Text “Financial Management and Decision Making”

206. b.000 per year. What is the present value of the trust given an 8% discount rate? a. How much must be invested today in order to generate a five-year annuity of $1.97 $1206.790.34 beginning in one year. $1326.790.87 $3. b. $3.Practice problems 1.87 $4.67 $ 587. b.34 $1096. How much remains in the account right after the second payment has been withdrawn? (Hint: simply consider the present value of the last remaining withdrawal. Decreasing the interest rate.) a. You and your heirs will receive $25.545. c. d.169. Decreasing the number of payments.000 is deposited into an account paying 10% annually.500 $337. at an interest rate of 10%? a. 4. Decreasing the amount of the payment.000 if the interest rate is 10% and the first payment is made today? a.000 per year forever. b.169. e. c.17 c. d. d. What is the present value of a five period annuity of $1.610. $1.500 2.32 . $182.79 d. other things equal? a. $4. beginning one year from now.51 b. Increasing the interest rate.79 5.446.45 A. with the first payment 1 year from today. You have just inherited a trust.000 $287. $3.500 $200. An amount of $3. to provide three annual withdrawals of $1.79 $4. $3.500 $312.790. c. c. Which of the following will increase the present value of an annuity. d.

000. A given rate is stated as 12% p.09% 11. If $50. to be amortized over 30 years? a.250. d.90 $771. "Sunflowers". $1.315.500.99% 13.067.88% 11. and the first payment occurs one year from now? a. d. c. to be repaid at 10% interest over 30 years with monthly payments of $438. d. annually semiannually quarterly monthly daily 11.40% 10.11% 10. sold for $125. d. e.000 9. Approximately how much must be saved in order to withdraw $100. e. and the car dealer offers to finance the balance over 18 months at an interest rate of 12% . $775.000 $2. What is the compounding interval during the year? a. how much would your average annually compounded rate of return have been? a.000. $157.000 $1. b.00 $107. One hundred years later it sold for $36 million.79. You need to pay a 20% deposit today.964. b. Had the painting been purchased by your greatgrandfather and passed on to you. b.000 $2.000 is borrowed for a home mortgage. how much interest is paid over the life of the loan? a.40 $ 75. What will be the monthly payment on a home mortgage of $75. In 1899.55%.53 8. d. b.40 $150.964. c.000 at 12% interest.6. c. 9. c.000 per year for the next 25 years for retirement if the balance earns 8% annually.00 7.61 $1034. Vincent Van Gogh's painting.46 $1028. b. You want to buy a car for $20.000. c..a. but has an affective annual rate of 12.

b. Both mortgages are for $100. c. What is the monthly payment required? 12. Assume that payment is made at the end of each month. Also assume that the average income is $40. Assume a 6% interest rate.000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? 15. 14. calculate the effective annual interest rate.e. Suppose an average New Zealander starts work at age 25.a.per annum.000 20-year 8% p. Verify the repayment amount for a $100.asp. Most banks have a mortgage calculator in their website. and that a retirement income of $20.a. standard (table) mortgage under monthly and fortnightly payment using your own calculations. For instance. A gin tonic may help.nbnz.a. you find that the “low” interest rate is actually an 18% stated annual rate. Now.co.e. .000 p. discount the answer to part (b) back 35 years). A loan officer says that “thousands of dollars can be saved by switching to a 15year mortgage from a 30-year mortgage. compounded quarterly.000 annuity at that time).000 annuity).000 p. over an account that paid 7. Would you prefer a savings account that paid 7% interest. or 1. This is a challenging one. is desired.5% interest. Calculate the present value of the retirement income at the beginning of retirement (i. present value of a 35-year $40.nz/personal/calculators/homeloan. Do not feel bad if you are confused. present value of a 20-year $20. What percentage of the average lifetime income must be set aside (or taxed) to fund the retirement for an individual? 16. Now calculate the present value today of the amount in part b (i.000 to deposit? Would the answer change if you had $100. After reading the fine print in your credit card agreement.000 to deposit? 13. to make you feel even worse.5% per month. and lives for another 20 years. a.5% with annual compounding if you had $1.e. Calculate the present value of the average lifetime income (i. retires at age 60.” Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.. visit: http://www.

Suggested answers for Module 1 (Finance) practice problems 1.000 PV 9. versus = (1 + i )n for simple interest = (1 + i/m)n* m for compound interest FV = (1 + 0.79 Decreasing the interest rate.1)*(1 – 1/1.500 $3.1699) + 1000 = 4169.000/(1+r)100 => r = (36.000 = C * (1/0.0825 ) = 1.964. Thus.1255 = (1+0.0719 FV = (1 + 0.87. 3. = 100.1 = 1.34 / 1.000/0.000 = C *PVAF(1%. $4169.1)*(1 – 1/1.096.000 *(1/0. 4. 10.000 $16.08)*(1 – 1/1.000 = $107. PV = $1.790.01360) = C * 97.46 8. The amount to be deposited should not change your preference.14) + 1000 = (1000 * 3. the 7.096. c c b $1.067.790.000.79. 11.62 ≅ 1.18) = C * 16. PV = 1000 * (1/0.46 75. m = 4. 2.000 $125 = $36.67 $107. e.206.08 = $312. d c.10 more in the first year than the 7% account with quarterly compounding.477.4% 1.075 12. 7.2183 C = 771.15) = $3.12/m)m .73 FV FV Then.075)1 = 1. C = $975. b c $25.067.000.067.964. 6.40 5.5% account will earn $3.79 * 360) – 50.67 (438. a $1.000*80% = $16.398 Therefore.07/4)1*4 = 1. c. . Amount borrowed = $20.87 1. By trial and error.000 * (1/0.000/125)(1/100)-1 = 13.01)*(1 – 1/1.40 $771.

1 + effective rate = (1 + r/m)m effective rate = (1+0.06)*(1.06)*(1.0075360) C = 804. a.007083)*(1 – 1/1. Don’t cheat.0635) = $579.398.42/1.69*180) = 289.0075)*(1 – 1/1. PV now = $229.929.93/$579.1/1.000*(1/0.15% 16.1956 –1 = 0.85 = 5.007083180) C = 984.01512 –1 = 1. .000 = C * (1/0. PV = $40.69 Difference in total dollars = (804.0635 =$29.663.62*360) – (984.1956 or 19.13.20 = $112. PV at age 60 = [$20.20 – 177.000 = C * (1/0.42 c.0620)] = $229.93 Percentage of income =$29. 15.398.845.419 14.18/12)12 – 1 = 1.1/1.244.929.85 b.56% 100. Go back and verify the answers.000*(1/0.62 100.845.

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