CH 4 Problems;

4-7
The time line for this problem is:
Cash Flow

-350

Period 0

X
8%

7%

5%

3 years

FV = PV (1 + i) (1 + j) (1 + k)
FV = 350 (1 + 0.08) (1 + 0.07) (1 + 0.05)
= 350 1.08 1.07 1.05
= 424.68
= 250/1.10
= 227.27
PV = 850/(1+0.12)10
= 850/3.10585
= 273.68
4-13
PV = FV/[(1 + i) (1 + j) (1 + k)]
PV = 1000/[(1 + 0.06) (1 +0.07) (1 + 0.06)]
= 1000/[1.06 1.07 1.06]
= 1000/1.2023
= 831.77
= 5000/[1.08 1.07]
= 5000/1.1556
= 4326.76
4-15
N = 72/7 10.3 years

4-33
FVAge 60 = PVAge 30 (1 + i) Years until age 60
FVAge 60 = 1000 (1.09)30
= 1,000 13.267678
= 13,267.68

FVAge 60 = PVAge 40 (1 + i) Years until age 60

FVAge 60 = 1000 (1.12)20
= 1,000 9.64629
= 9,646.29
The investment of $1,000 at age 30 yields more money at age 60, even though the interest rate is
lower. This illustrates the importance of starting to invest earlier in life.
4-35
FVN = PV (1 + i) N
1,500 = 2,000 (1 + i) 1
(1 + i) = 1,500/2,000
i = (0.75) -1 = 0.25, or 25% (first year return is negative)
FVN = PV (1 + i)N
2,000 = 1,500 (1 + i)1
(1 + i) = 2,000/1,500
i = (2/1.5) -1 = 0.3333 or 33.33%
(Second year return needs to be higher to compensate for the loss)
CH 5 Problems;

5-1
FV = $1,000 (1 + 0.10)7 + $1,500 (1 + 0.10)5 = $1,948.72 + $2,415.77 = $4,364.48

5-3

FVA 5

1 0.09 1
$5 00
$500 5.9847

0.09

$2,992 .36

5-5
PV = $1,000 (1 + 0.10)1 + $1,500 (1 + 0.10)3 = $909.09 + $1,126.97 = $2,036.06

5-7

1 1 0.095
PVA 5 $500
0.09

$500 3.889651 $1,944.83

5-11

PVA7 due = 6,500 (1 +0.085) = $7,052.50

5-15
12

0.11
EAR 1
1 0.115718841 11.57%
12

5-21

PV = $1,000 (1 + 0.06)1 + $1,200 (1 + 0.06)2 + $1,200 (1 + 0.06)3 + $1,500 (1 + 0.06)4

PV = $943.40 + $1,068 + $1,007.54 + $1,188.14 = $4,207.08

5-35

.10 / 12

$25,000 0.025362584 $634.06

PMT48 $25,000
1
1

1 .10 / 1248

If you only paid interest over the length of the loan and your principal balance was repaid at the
end of the 48 months, your payment would be $208.33 per month (= $25,0000.1012) for
interest only and you would owe $25,000 at the end of the 48 months, too.