DISCUSSION PROBLEMS

1. You plan to retire 33 years from now. You expect that you will live 27 years after retiring.
You want to have enough money upon reaching retirement age to withdraw $180,000
from the account at the beginning of each year you expect to live, and yet still have
$2,500,000 left in the account at the time of your expected death (60 years from now).
You plan to accumulate the retirement fund by making equal annual deposits at the end
of each year for the next 33 years. You expect that you will be able to earn 12% per
year on your deposits. However, you only expect to earn 6% per year on your
investment after you retire since you will choose to place the money in less risky
investments. What equal annual deposits must you make each year to reach your
retirement goal?
2. A father is now planning a savings program to put his daughter through college. She is
13, she plans to enroll at the university in 5 years, and she should graduate 4 years
later. Currently, the annual cost (for everything--food, clothing, tuition, books,
transportation, and so forth) is $15,000, but these costs are expected to increase by
5% annually. The college requires that this amount be paid at the start of the year. She
now has $7,500 in a college savings account that pays 6% annually. Her father will
make six equal annual deposits into her account; the first deposit today and the sixth n
the day she starts college. How large must each of the six payments be?
3. Consider a loan of $10.5 million that is paid off quarterly (at the end of each quarter) over a
period of fifty years. Assuming that after twenty-five years, the fixed rate on the loan of 1%
per year compounded quarterly, would increase by 1.5%.
A. Determine the quarter amortization(s) due over the life of loan.
B. Calculate the dollar amount of total interest that would be paid over the life of the
loan.
4. Steve and Robert were college roommates, and each is celebrating their 30th
birthday today. When they graduated from college nine years ago (on their 21st
birthday), they each received $5,000 from family members for establishing investment
accounts. Steve and Robert have added $5,000 to their separate accounts on each of
their following birthdays (22nd through 30th birthdays). Steve has withdrawn nothing
from the account, but Robert made one withdrawal on his 27th birthday. Steve has
invested the money in Treasury bills that have earned a return of 6 percent per year,
while Robert has invested his money in stocks that have earned a return of 12 percent
per year. Both Steve and Robert have the same amount in their accounts today. How
much did Robert withdraw on his 27th birthday?
5. Linda needs a new car and she is deciding whether it makes sense to buy or lease the car. She
estimates that if she buys the car it will cost her $17,000 today (t = 0) and that she would sell
the car four years from now for $7,000 (at t = 4). If she were to lease the car she would make a
fixed lease payment at the end of each of the next 48 months (4 years). Assume that the
operating costs are the same regardless of whether she buys or leases the car. Assume that if
she leases, there are no up-front costs and that there is no option to buy the car after four
years. Linda estimates that she should use a 6 percent nominal interest rate to discount the
cash flows. What is the breakeven lease payment? (That is, at what monthly lease payment
would she be indifferent between buying and leasing the car?)

DISCUSSION PROBLEMS
1. You plan to retire 33 years from now. You expect that you will live 27 years after retiring.
You want to have enough money upon reaching retirement age to withdraw $180,000 from
the account at the beginning of each year you expect to live, and yet still have $2,500,000
left in the account at the time of your expected death (60 years from now). You plan to
accumulate the retirement fund by making equal annual deposits at the end of each year for
the next 33 years. You expect that you will be able to earn 12% per year on your deposits.
However, you only expect to earn 6% per year on your investment after you retire since you
will choose to place the money in less risky investments. What equal annual deposits must
you make each year to reach your retirement goal? ANS: $8,874.79
2. Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after
he retires, until he is 85. He wants a fixed retirement income that has the same purchasing
power at the time he retires as $40,000 has today. (The real value of his retirement income
will decline annually after he retires.) His retirement income will begin the day he retires, 10
years from today, at which time he will receive 24 additional annual payments. Annual
inflation is expected to be 5%. he currently has $100,000 saved, and he expects to earn 8%
annually on his savings. How much must he save during each of the next 10 years (end-ofyear deposits) to meet his retirement goal? ANS: $36,949.61
3. Consider a loan of $10.5 million that is paid off quarterly (at the end of each quarter) over a
period of fifty years. Assuming that after twenty-five years, the fixed rate on the loan of 1%
per year compounded quarterly, would increase by 1.5%.
1. Determine the quarter amortization(s) due over the life of loan. ANS: $66,778.47; $79,551.6
2. Calculate the dollar amount of total interest that would be paid over the life of the loan. ANS:
$4,133,006.51
4. Steve and Robert were college roommates, and each is celebrating their 30th
birthday today. When they graduated from college nine years ago (on their 21st
birthday), they each received $5,000 from family members for establishing investment
accounts. Steve and Robert have added $5,000 to their separate accounts on each of
their following birthdays (22nd through 30th birthdays). Steve has withdrawn nothing
from the account, but Robert made one withdrawal on his 27th birthday. Steve has
invested the money in Treasury bills that have earned a return of 6 percent per year,
while Robert has invested his money in stocks that have earned a return of 12 percent
per year. Both Steve and Robert have the same amount in their accounts today. How
much did Robert withdraw on his 27th birthday? ANS: $15,545.07
5. Linda needs a new car and she is deciding whether it makes sense to buy or lease the
car. She estimates that if she buys the car it will cost her $17,000 today (t = 0) and that
she would sell the car four years from now for $7,000 (at t = 4). If she were to lease the
car she would make a fixed lease payment at the end of each of the next 48 months (4
years). Assume that the operating costs are the same regardless of whether she buys or
leases the car. Assume that if she leases, there are no up-front costs and that there is no
option to buy the car after four years. Linda estimates that she should use a 6 percent
nominal interest rate to discount the cash flows. What is the breakeven lease payment?
(That is, at what monthly lease payment would she be indifferent between buying and
leasing the car?) ANS: $269.85
3.

EXERCISE PROBLEMS
1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an
account that
pays an annual interest rate of 14%?
2. What will $247,000 grow to be in 9 years if it is invested today in an account with an annual
interest rate
of 11%?
3. How many years will it take for $136,000 to grow to be $468,000 if it is invested in an
account with an
annual interest rate of 8%?
4. At what annual interest rate must $137,000 be invested so that it will grow to be $475,000
in 14 years?
5. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an
account that pays
a quoted annual interest rate of 13% with semi-annual compounding of interest?
6. What will $153,000 grow to be in 13 years if it is invested today in an account with a
quoted annual
interest rate of 10% with monthly compounding of interest?
7. How many years will it take for $197,000 to grow to be $554,000 if it is invested in an
account with a
quoted annual interest rate of 8% with monthly compounding of interest?
8. At what quoted annual interest rate must $134,000 be invested so that it will grow to be
$459,000 in 15
years if interest is compounded weekly?
9. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of
interest. What is your effective annual interest rate?
10. You are offered an annuity that will pay $24,000 per year for 11 years (the first payment
will occur one
year from today). If you feel that the appropriate discount rate is 13%, what is the annuity
worth to you
today?
11. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each
year) in an account
that pays an annual interest rate of 14%, what will your account be worth at the end of 12
years?
12. You plan to borrow $389,000 now and repay it in 25 equal annual installments (payments
will be made
at the end of each year). If the annual interest rate is 14%, how much will your annual
payments be?
13. You are told that if you invest $11,000 per year for 23 years (all payments made at the
end of each
year) you will have accumulated $366,000 at the end of the period. What annual rate of
return is the
investment offering?

14. Robert recently borrowed $20,000 to purchase a new car. The car loan is fully
amortized over 4 years. In other words, the loan has a fixed monthly payment, and the
loan balance will be zero after the final monthly payment is made. The loan has a
nominal interest rate of 12 percent with monthly compounding. Looking ahead, Robert
thinks there is a chance that he will want to pay off the loan early, after 3 years (36
months). What will be the remaining balance on the loan after he makes the 36 th
payment?
15. A father is now planning a savings program to put his daughter through college. She is 13,
she plans to enroll at the university in 5 years, and she should graduate 4 years later.
Currently, the annual cost (for everything--food, clothing, tuition, books, transportation, and
so forth) is $15,000, but these costs are expected to increase by 5% annually. The college
requires that this amount be paid at the start of the year. She now has $7,500 in a college
savings account that pays 6% annually. Her father will make six equal annual deposits into her
account; the first deposit today and the sixth n the day she starts college. How large must
each of the six payments be?

EXERCISE PROBLEMS
1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an
account that
pays an annual interest rate of 14%?
Ans: n = 13
i = 14
FV = 140000
solve for PV (answer = $25,489.71)
2. What will $247,000 grow to be in 9 years if it is invested today in an account with an annual
interest rate
of 11%?
Ans: n = 9
i = 11
PV = -247000
solve for FV (answer = $631,835.12)
3. How many years will it take for $136,000 to grow to be $468,000 if it is invested in an
account with an
annual interest rate of 8%?
Ans: i = 8
PV = -136000
FV = 468000
solve for n (answer = 16.06 years)
4. At what annual interest rate must $137,000 be invested so that it will grow to be
$475,000 in 14 years?
Ans: 4. n=14
PV = -137000
FV = 475000
solve for i (answer = 9.29%)
5. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an
account that pays
a quoted annual interest rate of 13% with semi-annual compounding of interest?
Ans: n = 10 (5 years times 2 comp. periods per year)
i = 6.5 (13% annually divided by 2 comp. period per year)
FV = 197000
solve for PV (answer = $104,947.03)
6. What will $153,000 grow to be in 13 years if it is invested today in an account with a
quoted annual
interest rate of 10% with monthly compounding of interest?
Ans: n = 156 (13 years times 12 comp. periods per year)
i = 0.833333 (10% annually divided by 12 comp. periods per year)
PV = -153,000
solve for FV (answer = $558,386.38)
7. How many years will it take for $197,000 to grow to be $554,000 if it is invested in an
account with a
quoted annual interest rate of 8% with monthly compounding of interest?
Ans: i = 0.666667 (8% annually divided by 12 comp. periods per year)
PV = -197000
FV = 554000
solve for n (answer on calculator = 155.61)
Since the interest rate was entered as a monthly rate, the answer for n is in
months.
The number of years equals the number of months divided by twelve.
Number of years = (155.61)/12 = 12.97 years

8. At what quoted annual interest rate must $134,000 be invested so that it will grow to be
$459,000 in 15
years if interest is compounded weekly?
Ans: n = 780 (15 years times 52 comp. periods per year)
PV = -134,000
FV = 459,000
solve for i (answer on calculator = 0.157972)
Since the number of periods was entered as weeks, the answer for i is the weekly
rate.
The annual rate equals the weekly rate times 52.
Annual rate = (0.157972%)(52) = 8.21%
9. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of
interest. What is your effective annual interest rate?
Ans: n = 4 (number of comp. periods in one year)
i = 3.25 (13% annually divided by 4 comp. periods in one year)
PV = -100
solve for FV (answer = 113.65)
Subtract the 100 (percent) you initial had to get the EAR.
EAR = 113.65 100 = 13.65%
10. You are offered an annuity that will pay $24,000 per year for 11 years (the first payment
will occur one
year from today). If you feel that the appropriate discount rate is 13%, what is the annuity
worth to you
today?
Ans: n = 11
i = 13
PMT = -24000
Make sure you are in end mode.
solve for PV (answer = $136,486.59)
11. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each
year) in an account that pays an annual interest rate of 14%, what will your account be
worth at the end of 12 years?
Ans: n = 12
i = 14
PMT = 16000
Make sure you are in end mode.
solve for FV (answer = $436,331.98)
12. You plan to borrow $389,000 now and repay it in 25 equal annual installments (payments
will be made
at the end of each year). If the annual interest rate is 14%, how much will your annual
payments be?
Ans: n = 25
i = 14
PV = -389000
Make sure you are in end mode.
solve for PMT (answer = $56,598.88)
13. You are told that if you invest $11,000 per year for 23 years (all payments made at the
end of each
year) you will have accumulated $366,000 at the end of the period. What annual rate of
return is the
investment offering?
Ans: n = 23
FV = 366000

PMT = -11000
Make sure you are in end mode.
solve for i (answer = 3.21%)
14. Robert recently borrowed $20,000 to purchase a new car. The car loan is fully
amortized over 4 years. In other words, the loan has a fixed monthly payment, and the
loan balance will be zero after the final monthly payment is made. The loan has a
nominal interest rate of 12 percent with monthly compounding. Looking ahead, Robert
thinks there is a chance that he will want to pay off the loan early, after 3 years (36
months). What will be the remaining balance on the loan after he makes the 36 th
payment?
Answer: $5,927.79

FINCAL
First Step: Calculate fixed monthly payment
-CMPD FUNCTION
n = t*m = 12*4 = 48
I% = r/m = 12/12 = 1
PV = 20,000
FV = 0
P/Y = 1 (default)
C/Y = 1 (default)
PMT (Solve) = -526.68 (outflow)
OR
n = t*m = 12*4 = 48
I% = r = 12
PV = 20,000
FV = 0
P/Y = 12 ~ m
C/Y = 12 ~ m
PMT (Solve) = -526.68 (outflow)

Second Step: Find the balance of the loan at

36th period
-AMRT FUNCTION (carry forward)
PM1 = 36
PM2 = 36
n = 48
I% = 1
PV = 20,000
FV = 0
P/Y = 1
C/Y = 1
BAL: Solve = 5,927.79
OR
PM1 = 36
PM2 = 36
n = 48
I% = 12
PV = 20,000
FV = 0
P/Y = 12
C/Y = 12
BAL: Solve = 5,927.79
PM1 and PM2 determine the range or point in
time in a loan

15. A father is now planning a savings program to put his daughter through college. She is 13,
she plans to enroll at the university in 5 years, and she should graduate 4 years later.
Currently, the annual cost (for everything--food, clothing, tuition, books, transportation, and
so forth) is $15,000, but these costs are expected to increase by 5% annually. The college
requires that this amount be paid at the start of the year. She now has $7,500 in a college
savings account that pays 6% annually. Her father will make six equal annual deposits into her
account; the first deposit today and the sixth n the day she starts college. How large must
each of the six payments be?
FIRST STEP (using the cash flow function)

I = 6% (rate for investment)

Cash Flow (Csh = D.Editor x)
1 -15000(1.05)5 withdrawal
2 -15000(1.05)6 withdrawal
3 -15000(1.05)7 withdrawal
4 -15000(1.05)8 withdrawal
year in college

for
for
for
for

1st
2st
3st
4st

year
year
year
year (FV) (last payment at the beginning of her 4th

8 years after she was 13 years old)

Solve for NPV. (It will be negative representing total cash outflow.)

o Answer : -75,500.0577(use the store function)

SECOND STEP

Note, NPV (previous answer) becomes the FV which means the end of cash
inflows/investments.

Deduct the FV by the value of 7,500 in the last period (7500(1.06)5).

Note, deduct it by adding because the previous amount as NPV is negative.

o Answer : -65,463.36587(use the store function again)
This deduction will be necessary to compute for the amount that was contributed by the
yearly cash inflow only.
The value computed is the accumulated amount of the yearly cash inflow (which is the
unknown) from she was 13 y/o until she was 18 for a total of 6 payments.
THIRD STEP (using the compounding function)
Compute for the 6 equal cash inflows (solve for PMT):
o FV = amount previously computed (SECOND STEP)
o I = 6%
o n = 6 periods (assumption is from she was 12y/o)

o PV = 0 (7500 is already deducted in second step. It is inappropriate to use it as PV in this

step.)
o set = end
o FINAL ANSWER = 9385.0002