Chapter 6

Problems 1-78
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel. To install these, click on the Office button then "Excel Options," "Add-Ins" and select "Go." Check "Analyis ToolPak" and "Solver Add-In," then click "OK."

require that

Chapter 6
Question 1 Input area: Output area:

Discount rate

10%

Year Cash flow 1 $ 950 2 1,040 3 1,130 4 1,075 $ 3,306.37

Chapter 6
Question 2 Input area:

Discount rate # of years for X # of years for Y Payment for X Payment for Y $

5% 9 6 6,000 8,000

Output area:

Value of X Value of Y

$ 42,646.93 $ 40,605.54

Chapter 6
Question 3 Input area: Output area:

Discount rate

8%

Year Cash flow 1 $ 940 2 1,090 3 1,340 4 1,405 $ 5,307.71

Chapter 6
Question 4 Input area:

Payment per year # of years Required rate of return

$

5,300 15 7%

Output area:

Present value PV (forever)

$ 48,271.94 $ 75,714.29

Chapter 6
Question 5 Input area:

Initial investment $ Interest rate on annuity # of years

34,000 7.65% 15

Output area:

Annuity payment

$

3,887.72

Chapter 6
Question 6 Input area:

Annual savings # of years Interest rate on annuity

$

73,000 8 8.5%

Output area:

Present value

$ 411,660.36

Chapter 6
Question 7 Input area:

Annual deposit # of years Interest rate on annuity

$

4,000 20 11.2%

Output area:

Future value

$

262,781.16

Chapter 6
Question 8 Input area:

Desired amount # of years Interest rate

$

90,000 10 6.8%

Output area:

Annual deposit

$

6,575.77

Chapter 6
Question 9 Input area:

Desired amount # of years Interest rate

$

50,000 7 7.50%

Output area:

Loan payment

$

9,440.02

Chapter 6
Question 10,11 Input area:

Desired amount Interest rate Cost of policy

$

25,000 7.20% 375,000

$

Output area:

Present value Required interest rate

$ 347,222.22 6.67%

Chapter 6
Question 12 Input area: Output area:

Stated rate (APR) # of times per year 8% 4 16% 12 12% 365 15% Infinite

Effective rate 8.24% 17.23% 12.75% 16.18%

Chapter 6
Question 13 Input area: Output area:

Stated rate (APR) # of times per year 8.42% 2 18.20% 12 8.99% 52 15.27% Infinite

Effective rate 8.60% 19.80% 9.40% 16.50%

Chapter 6
Question 14 Input area: Output area:

First National Bank First United Bank

Stated rate (APR) # of times per year 14.2% 12 14.5% 2

Effective rate 15.16% 15.03%

Chapter 6
Question 15 Input area: Output area:

Stated rate (APR) 14.85%

# of times per year 365

Effective rate 16%

The borrower is actually paying annualized interest of 16% per year, not the 14.85% reported on the loan contract.

Chapter 6
Question 16 Input area:

Deposit # of years Interest rate # of times compounded per year

$

2,100 17 8.4% 2

Output area:

Future value

$8,505.93

Chapter 6
Question 17 Input area:

Interest rate # of times compounded per year Deposit # of years

$

9.30% 365 4,500 5

Output area:

Future value

$7,163.64

Chapter 6
Question 18 Input area:

Future value of investment # of years Discount rate # of times compounded per year

$

58,000 7 10% 365

Output area:

Present value of investment

$28,804.71

Chapter 6
Question 19 Input area:

Interest rate Compounding periods

30% 12

Output area:

APR EAR

360.00% 2229.81%

Chapter 6
Question 20 Input area:

Future value of investment Discount rate # of years # of times compounded per year

$

68,500 6.9% 5 12

Output area:

Payment Effective interest rate

$

1,353.15 7.12%

Chapter 6
Question 21 Input area:

Monthly payment Discount rate Current balance

$ $

500 1.3% 18,000.00

Output area:

# of months until paid off

48.86

Chapter 6
Question 22 Input area:

Present value Future value

$ $

3 4

Output area:

Interest rate per week APR EAR

33.33% 1733.33% 313916515.69%

Chapter 6
Question 23 Input area:

Monthly payment Contract price

$ $

1,800 95,000

Output area:

Monthly return APR EAR

1.89% 22.74% 25.26%

Chapter 6
Question 24 Input area:

Monthly deposit # of times compounded per year Interest rate on annuity # of years

$

300 12 10% 30

Output area:

Future value of annuity

$ 678,146.38

Chapter 6
Question 25 Input area:

Annual deposit # of times compounded per year Interest rate on annuity # of years

$

3,600 12 10% 30

Output area:

EAR Future value of annuity

10.47% $ 647,623.45

Chapter 6
Question 26 Input area:

Quarterly withdrawal # of times compounded per year # of years Interest rate per quarter

$

2,300 4 4 0.65%

Output area:

Amount needed today

$

34,843.71

Chapter 6
Question 27 Input area: Output area:

Discount rate # of times compounded

11% 4

Year Cash flow 1 $ 725 2 980 3 0 4 1,360 $2,320.36 EAR 11.46%

Chapter 6
Question 28 Input area: Output area:

Discount rate

8.45%

Year Cash flow 1 $ 1,650 2 0 3 4,200 4 2,430 $ 6,570.86

Chapter 6
Question 29 Input area:

Interest rate # of years

7% 10

Output area:

First Complex Bank interest rate

5.45%

Chapter 6
Question 30 Input area:

Effective annual rate # of times compounded

17% 12

Output area:

APR Effective rate per period

15.80% 1.32%

Chapter 6
Question 31 Input area:

Interest rate first six months Interest rate thereafter # of times compounded Balance transferred $

1.50% 18% 12 5,000

Output area:

Accrued interest

$ 508.35

Chapter 6
Question 32 Input area:

Monthly stock investment Monthly bond investment Stock return Bond return Years to save Retirement return Retirement years

$ $

700 300 11% 6% 30 9% 25

Output area:

FV of stock account FV of bond account Total account FV Monthly withdrawal

$ 1,963,163.82 $ 301,354.51 $ 2,264,518.33 $ 19,003.76

Chapter 6
Question 33 Input area: Output area:

Interest per month 1.17% 1.17%

# of years 1 2 $

Amount invested 1 1

Future value $1.15 $1.32

Chapter 6
Question 34 Input area:

Amount needed Years to save Return Years to wait before beginning

$ 1,000,000 40 12% -

Output area:

Monthly deposit starting now

$

85.00

Chapter 6
Question 35 Input area:

Present value Future value Number of periods

$ $

1 3 1

Output area:

Effective annual rate Annual percentage rate Quarterly return

200.00% 126.43% 31.61%

Chapter 6
Question 36 Input area:

Amount per year in option 1 Amount per year in option 2 Signing bonus in option 2 Interest rate # of times compounded per year

$ $

95,000 70,000 45,000 10% 12

Output area:

EAR Present value of option 1 Present value of option 2 $ $

10.47% 163,839.09 165,723.54

Chapter 6
Question 37 Input area:

Payment today Length of payments Annual increase Return

$

1,000,000 30 5% 8%

Output area:

Present value of future payments

$

19,016,563.18

Chapter 6
Question 38 Input area:

Current salary Percent of salary to deposit Return Salary increase Deposit length

$

50,000 5% 11% 4% 40

Output area:

Next year's salary Next year's deposit Present value deposits Future value of deposits

$ $ $ $

52,000 2,600 34,399.45 2,235,994.31

Chapter 6
Question 39 Input area:

# of years Annuity payment per year Interest rate

$

15 9,000 15%

Output area:

Value of investment

$ 52,626.33

Present value falls as r increases, and rises as r decreases. Future value rises as r increases, and falls as r decreases.

Chapter 6
Question 40 Input area:

Monthly payment Interest rate Future value of account

$ $

340.00 6% 20,000

Output area:

Number of payments

51.69

Chapter 6
Question 41 Input area:

Price of sailboat Monthly payment Number of months

$ $

73,000 1,450 60

Output area:

Monthly rate APR

0.594% 7.13%

Chapter 6
Question 42 Input area:

Number of years Price of house APR Monthly payment

$ $

30 240,000 6.35% 1,150

Output area:

Present value of payments Remaining principal Balloon payment

$ 184,817.42 $ 55,182.58

$ 368,936.54

Chapter 6
Question 43 Input area:

PV of cash flows Year 1 2 3 4 Discount rate

$ $ $ $ $

6,550 Cash flow 1,700 2,100 2,800 10%

Output area:

Year 1 2 3 4 Total PV of missing CF Value of missing CF

$ $ $ $ $ $ $

PV 1,545.45 1,577.76 1,912.44 5,035.65 1,514.35 1,832.36

Chapter 6
Question 44 Input area:

First payment $ Annual increase $ Discount rate

1,000,000 500,000 9%

Output area:

Year 0 $ 1 2 3 4 5 6 7 8 9 10 Present value

Payments 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 5,000,000 5,500,000 6,000,000

$ $ $ $ $ $ $ $ $ $ $ $

Present Value 1,000,000.00 1,376,146.79 1,683,359.99 1,930,458.70 2,125,275.63 2,274,759.85 2,385,069.31 2,461,654.10 2,509,331.40 2,532,352.79 2,534,464.84 22,812,873.40

Chapter 6
Question 45 Input area:

Number of years Percentage of pruchase price Price of warehouse Monthly payment

$ $

30 80% 2,900,000 15,000

Output area:

Amount of loan Interest rate per month APR EAR

$

2,320,000 0.560% 6.72% 6.93%

Chapter 6
Question 46 Input area:

Selling price # of years until sale Production cost Discount rate

$ $

165,000 4 94,000 13.0%

Output area:

Present value of sale Profit (loss) Breakeven rate

$ 101,197.59 $ 7,197.59 15.10%

Chapter 6
Question 47 Input area:

Annual payment Discount rate Year of first payment Year of last payment

$

4,000 10% 8 25

Output area:

PV at beginning of payments Value today

$ $

32,805.65 16,834.48

Chapter 6
Question 48 Input area:

Monthly payment # of years Interest rate 1 # of years Interest rate 2 # of years

$ 1,500 15 11% 7 7% 8

Output area:

Value today of interest rate 1 payments Value of interest rate 2 payments at rate change Value today of interest rate 2 payments Total present value of the annuity

$ 87,604.36 $ 110,021.35 $ 51,120.33 $ 138,724.68

Chapter 6
Question 49 Input area:

Investment A: # of years Monthly payment Interest rate Investment B: # of years Interest rate

$

15 1,200 8.50%

15 8%

Output area:

Future value of investment A Lump sum needed

$ $

434,143.62 130,761.55

Chapter 6
Question 50 Input area:

Interest rate Year to find value Amount of payment Year of first perpetual payment

$

6.2% 7 3,500 15

Output area:

Present value of perpetual stream Present value at requested year

$ $

56,451.61 37,051.41

Chapter 6
Question 51 Input area:

Quoted interest rate Amount borrowed Interest per year Monthly payment Periods/year

$ $ $

16% 25,000 4,000 2,416.67 12

Output area:

Monthly rate APR EAR

2.361% 28.33% 32.31%

Chapter 6
Question 52 Input area:

# of years Amount of semiannual payment # of years until first payment Discount rate Compounding periods per year Year to find present value

$

5 7,000 8.50 10% 12 -

Output area:

Semiannual interest rate PV of annuity at year 8 Effective annual rate Present value at requested year

5.105% $ 53,776.72 10.47% $ 24,243.67

Chapter 6
Question 53 Input area:

Annual payment # of years Discount rate

$

10,000 5 11%

Output area:

a) PV of ordinary annuity PV of annuity due b) FV of ordinary annuity FV of annuity due

$ 36,958.97 $ 41,024.46 $ 62,278.01 $ 69,128.60

Chapter 6
Question 54 Input area:

Value of lease contract # of months APR

$

68,000 60 7.85%

Output area:

Monthly payment

$1,364.99

Chapter 6
Question 55 Input area:

Loan amount Interest rate Loan term

$

42,000 8% 5

Output area:

Loan payment

$10,519.17 Total payment Interest paid $ 10,519.17 $ 3,360.00 10,519.17 2,787.27 10,519.17 2,168.71 10,519.17 1,500.68 10,519.17 779.20 $ 10,595.86

Year Beginning balance 1 $ 42,000.00 2 34,840.83 3 27,108.92 4 18,758.47 5 9,739.97 Total interest paid over life of loan =

Principal paid Ending balance $ 7,159.17 $ 34,840.83 7,731.90 27,108.92 8,350.46 18,758.47 9,018.49 9,739.97 9,739.97 -

Chapter 6
Question 56 Input area:

Loan amount Interest rate Loan term

$

42,000 8% 5

Output area:

Loan payment

$8,400.00 Total payment Interest paid $ 11,760.00 $ 3,360.00 11,088.00 2,688.00 10,416.00 2,016.00 9,744.00 1,344.00 9,072.00 672.00 $ 10,080.00

Year Beginning balance 1 $ 42,000.00 2 33,600.00 3 25,200.00 4 16,800.00 5 8,400.00 Total interest paid over life of loan =

Principal paid Ending balance $ 8,400.00 $ 33,600.00 8,400.00 25,200.00 8,400.00 16,800.00 8,400.00 8,400.00 8,400.00 0.00

Chapter 6
Question 57 Input area:

Years until retirement Monthly retirement income Years in retirement Years until cabin purchase Cabin price Inheritance Monthly savings for first years Pre-retirement EAR Retirement EAR

$

$ $ $

30 20,000 25 10 380,000 900,000 2,500 10% 7%

Output area:

Pre-retirement APR Retirement APR Savings value until cabin purchase Savings after cabin purchase FV of initial savings PV of retirement spending PV of inheritance Amount needed at retirement Retirement shortfall Savings needed per month $ $ $

9.57% 6.78% 499,659.64 119,659.64 805,010.23

$ 2,885,496.45 $ 165,824.26

$ 3,051,320.71 $ 2,246,310.48 $ 3,127.44

Chapter 6
Question 58 Input area:

Years for lease Car price Payment today Monthly lease payment Loan rate Resale price

$ $ $ $

3 32,000 99 450 7% 23,000

Output area:

PV of lease payments PV of resale price PV of purchase You should the car since the PV is lower. Breakeven present value Breakeven resale price

$ $ $

14,672.91 18,654.82 13,345.18 Buy

$

17,327.09 $21,363.01

Chapter 6
Question 59 Input area:

Year 0 1 2 3 4 5 6 Requested signing bonus Requested salary increase Interest rate Compunding periods

$ $ $ $ $ $ $ $ $

7,000,000 4,500,000 5,000,000 6,000,000 6,800,000 7,900,000 8,800,000 9,000,000 1,400,000 5.5% 365

Output area:

EAR PV of salary offer PV of salary with increase Effective quarterly interest rate Quarterly salary

5.65% $ 38,610,482.57 $ 40,010,482.57 1.384% $1,527,463.76

Chapter 6
Question 60 Input area:

Amount of loan # of years APR

$

25,000 1 15%

Output area:

Amount received EAR

$ 21,250.00 17.65%

Chapter 6
Question 61 Input area:

Salary for 2 years ago Last year's salary Future salary Years for future salary Pain and suffering Court costs EAR

$ $ $ $ $

47,000 50,000 55,000 5 100,000 20,000 8%

Output area:

APR Value 1 year ago of salary 2 years ago Value today of salary 2 yrs ago Value today of last year's salary Value of next 5 year's salary Total value awarded

7.72%

$ $ $ $

48,699.39 52,595.34 51,807.86 227,539.14

$ 451,942.34

Chapter 6
Question 62 Input area:

Amount of loan # of years APR Points

$

10,000 1 8% 3%

Output area:

EAR

11.34%

Chapter 6
Question 63 Input area:

Amount of loan # of years APR # of points

$

10,000 1 11% 2%

Output area:

EAR

13.27%

The effective rate is not affected by the loan amount, since it drops out when solving for R .

Chapter 6
Question 64 Input area:

# of years Amount of loan Interest rate Fees

$ $

30 240,000 6.80% 2,300

Output area:

Refundable fee: Monthly payment Monthly interest APR EAR Nonrefundable fee: APR EAR

$

1,579.61 0.5745% 6.89% 7.12%

6.80% 7.02%

Chapter 6
Question 65 Input area:

Amount of loan # of years Interest rate

$

1,000 3 14%

Output area:

Total repayment Monthly payment Monthly interest APR EAR

$ $

1,481.54 41.15 2.30% 27.61% 31.39%

It's called add-on interest because the interest amount of the loan is added to the principal amount of the loan before the loan payments are calculated.

Chapter 6
Question 66 Input area:

# of years until retirement Annual withdrawal # of years to withdraw Interest rate Employer contribution Trust fund distribution Years until distribution

$

30 105,000 20 7% 1,500 150,000 20

$ $

Output area:

a. Present value of withdrawals Annual deposit until retirement b. Present value in lump sum c. Future value of trust fund deposit Total annual deposit necessary Friend's annual deposit

$ 1,112,371.50 $ $ $ $ $ 11,776.01 146,129.04 295,072.70 8,652.25 7,152.25

Chapter 6
Question 67 Input area:

Amount of debt Interest rate on current card Interest rate on new card Planned monthly payment Transfer fee

$

$

10,000 19.8% 6.2% 200 2%

Output area:

# of months to pay off current card # of months to pay of new card Difference Amount of bill with fees # of months with fees $

106.50 57.99 48.51 10,200 59.35

Chapter 6
Question 68 Input area:

Payout at retirement # of years until retirement Year 1 2 3 4 5 6 Interest rate 1 # of years Interest rate 2 # of years

$

500,000 65 Payment 900 900 1,000 1,000 1,100 1,100 12% 6 8% 59

$

Output area:

Year 1 2 3 4 5 6 Total value at year 6 Total value at year 65

Value at Year 6 $ 1,586.11 $ 1,416.17 $ 1,404.93 $ 1,254.40 $ 1,232.00 $ 1,100.00 $ 7,993.60 $ 749,452.56

The policy is not worth buying; the FV of the policy is less than the payout at retirement. We could also compare the PV of the two cash flows. If we compare the PV: Value of deposits Value of payment from insurance company $ 4,049.81

$

2,701.84

Either way, we still choose the same policy.

Chapter 6
Question 69 Input area:

Amount of loan APR # of years # of years until balloon payment

$

750,000 8.1% 30 8

Output area:

Monthly payment # of payments left after balloon payment Total amount of balloon payment

$

5,555.61 264

$ 683,700.32

Chapter 6
Question 70 Input area:

Annual payment # of years Annual payout # of years

$

9,000 6 20,000 4

$

Output area:

Year 1 2 3 4 5 6 7 8 9 10 Breakeven rate

$ $ $ $ $ $ $ $ $ $

Cash flow (9,000) (9,000) (9,000) (9,000) (9,000) (9,000) 20,000 20,000 20,000 20,000 8.07%

Chapter 6
Question 71 Input area:

Plan X: Annual payment # of years Plan Y: Annual payout # of years

$

20,000 In perpetuity

$

28,000 20

Output area:

Discount rate needed

6.46%

Chapter 6
Question 72 Input area:

Biannual payment APR Compunding periods b. Payments begin in (yrs)

$

15,000 10% 365 4

Output area:

a. EAR Effective 2-year rate Present value of perpetuity Value today b. Value today $ $ $

10.52% 22.14% 67,760.07 74,885.44 55,478.78

Chapter 6
Question 73 Input area:

Present value of annuity =

$C + $C + …+ (1 + r) (1 + r)^2

$C (1 + r)^N

Present value of annuity due = $C +

$C +…+ $C (1 + r) (1 + r)^(N-1) $C + …+ (1 + r) $C (1 + r)^N

Present value of annuity due = (1 + r)

= (1 + r) PVA Future value of annuity = $C + $C(1 + r) + $C(1 + r)2 + … + $C(1 + r)N-1 Future value of annuity due = $C(1 + r) + $C(1 + r)2 + … + $C(1 + r)N Future value of annuity due = (1 + r) ($C + $C(1 + r) + … + $C(1 + r)N-1) = (1 + r) FVA

Chapter 6
Question 74 Input area:

Years until retirement Next year's salary Salary growth rate Investment return Desired retirement value

40 40,000 3% 11% $ 2,000,000 $

Output area:

PV of retirement value Amount to save next year Pecentage of salary

$ 30,768.82 $ 2,591.56 6.48%

Chapter 6
Question 75 Input area:

Weekly interest rate # of weeks c. Loan amount Loan proceeds Loan payments

$ $ $

7% 1 100 68.92 25.00

Output area:

a. APR EAR b. Weekly rate APR EAR c. Weekly rate APR EAR

364.00% 3272.53% 7.53% 391.40% 4253.98% 16.75% 871.00% 314215.72%

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