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."
equire 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 5%

# of years for X 9
# of years for Y 6

Payment for X $ 6,000

Payment for Y 8,000

Output area:

Value of X $ 42,646.93

Value of Y $ 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 $ 5,300

# of years 15
Required rate of return 7%

Output area:

Present value $ 48,271.94

PV (forever) $ 75,714.29
Chapter 6
Question 5

Input area:

Initial investment $ 34,000

Interest rate on annuity 7.65%
# of years 15

Output area:

Annuity payment $ 3,887.72

Chapter 6
Question 6

Input area:

Annual savings $ 73,000

# of years 8
Interest rate on annuity 8.5%

Output area:

Present value $ 411,660.36

Chapter 6
Question 7

Input area:

Annual deposit $ 4,000

# of years 20
Interest rate on annuity 11.2%

Output area:

Future value $ 262,781.16

Chapter 6
Question 8

Input area:

Desired amount $ 90,000

# of years 10
Interest rate 6.8%

Output area:

Annual deposit $ 6,575.77

Chapter 6
Question 9

Input area:

Desired amount $ 50,000

# of years 7
Interest rate 7.50%

Output area:

Loan payment $ 9,440.02

Chapter 6
Question 10,11

Input area:

Desired amount $ 25,000

Interest rate 7.20%

Cost of policy $ 375,000

Output area:

Present value $ 347,222.22

Required interest rate 6.67%

Chapter 6
Question 12

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

8% 4 8.24%
16% 12 17.23%
12% 365 12.75%
15% Infinite 16.18%
Chapter 6
Question 13

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

8.42% 2 8.60%
18.20% 12 19.80%
8.99% 52 9.40%
15.27% Infinite 16.50%
Chapter 6
Question 14

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

First National Bank 14.2% 12 15.16%
First United Bank 14.5% 2 15.03%
Chapter 6
Question 15

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

14.85% 365 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 $ 2,100
# of years 17
Interest rate 8.4%
# of times compounded per year 2

Output area:

Future value $8,505.93

Chapter 6
Question 17

Input area:

Interest rate 9.30%

# of times compounded per year 365
Deposit $ 4,500
# of years 5

Output area:

Future value $7,163.64

Chapter 6
Question 18

Input area:

Future value of investment $ 58,000

# of years 7
Discount rate 10%
# of times compounded per year 365

Output area:

Present value of investment $28,804.71

Chapter 6
Question 19

Input area:

Interest rate 30%

Compounding periods 12

Output area:

APR 360.00%

EAR 2229.81%
Chapter 6
Question 20

Input area:

Future value of investment $ 68,500

Discount rate 6.9%
# of years 5
# of times compounded per year 12

Output area:

Payment $ 1,353.15

Effective interest rate 7.12%

Chapter 6
Question 21

Input area:

Monthly payment $ 500

Discount rate 1.3%
Current balance $ 18,000.00

Output area:

# of months until paid off 48.86

Chapter 6
Question 22

Input area:

Present value $ 3
Future value $ 4

Output area:

Interest rate per week 33.33%

APR 1733.33%

EAR 313916515.69%
Chapter 6
Question 23

Input area:

Monthly payment $ 1,800

Contract price $ 95,000

Output area:

Monthly return 1.89%

APR 22.74%

EAR 25.26%
Chapter 6
Question 24

Input area:

Monthly deposit $ 300

# of times compounded per year 12
Interest rate on annuity 10%
# of years 30

Output area:

Future value of annuity $ 678,146.38

Chapter 6
Question 25

Input area:

Annual deposit $ 3,600

# of times compounded per year 12
Interest rate on annuity 10%
# of years 30

Output area:

EAR 10.47%

Future value of annuity $ 647,623.45

Chapter 6
Question 26

Input area:

Quarterly withdrawal $ 2,300

# of times compounded per year 4
# of years 4
Interest rate per quarter 0.65%

Output area:

Amount needed today $ 34,843.71

Chapter 6
Question 27

Input area:
Output area:

Discount rate 11%

# of times compounded 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 7%
# of years 10

Output area:

First Complex Bank interest rate 5.45%

Chapter 6
Question 30

Input area:

Effective annual rate 17%

# of times compounded 12

Output area:

APR 15.80%

Effective rate per period 1.32%

Chapter 6
Question 31

Input area:

Interest rate first six months 1.50%

Interest rate thereafter 18%
# of times compounded 12
Balance transferred $ 5,000

Output area:

Accrued interest $ 508.35

Chapter 6
Question 32

Input area:

Monthly stock investment $ 700

Monthly bond investment $ 300
Stock return 11%
Bond return 6%
Years to save 30
Retirement return 9%
Retirement years 25

Output area:

FV of stock account $ 1,963,163.82

FV of bond account $ 301,354.51
Total account FV $ 2,264,518.33

Monthly withdrawal $ 19,003.76

Chapter 6
Question 33

Input area:
Output area:

Interest per month # of years Amount invested Future value

1.17% 1 $ 1 $1.15
1.17% 2 1 $1.32
Chapter 6
Question 34

Input area:

Amount needed $ 1,000,000

Years to save 40
Return 12%
Years to wait before beginning -

Output area:

Monthly deposit starting now $ 85.00

Chapter 6
Question 35

Input area:

Present value $ 1
Future value $ 3
Number of periods 1

Output area:

Effective annual rate 200.00%

Annual percentage rate 126.43%

Quarterly return 31.61%

Chapter 6
Question 36

Input area:

Amount per year in option 1 $ 95,000

Amount per year in option 2 $ 70,000

Signing bonus in option 2 45,000

Interest rate 10%

# of times compounded per year 12

Output area:

EAR 10.47%

Present value of option 1 $ 163,839.09

Present value of option 2 $ 165,723.54

Chapter 6
Question 37

Input area:

Payment today $ 1,000,000

Length of payments 30
Annual increase 5%
Return 8%

Output area:

Present value of future payments $ 19,016,563.18

Chapter 6
Question 38

Input area:

Current salary $ 50,000

Percent of salary to deposit 5%
Return 11%
Salary increase 4%
Deposit length 40

Output area:

Next year's salary $ 52,000

Next year's deposit $ 2,600

Present value deposits $ 34,399.45

Future value of deposits $ 2,235,994.31

Chapter 6
Question 39

Input area:

# of years 15
Annuity payment per year $ 9,000
Interest rate 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 $ 340.00

Interest rate 6%
Future value of account $ 20,000

Output area:

Number of payments 51.69

Chapter 6
Question 41

Input area:

Price of sailboat $ 73,000

Monthly payment $ 1,450
Number of months 60

Output area:

Monthly rate 0.594%

APR 7.13%
Chapter 6
Question 42

Input area:

Number of years 30
Price of house $ 240,000
APR 6.35%
Monthly payment $ 1,150

Output area:

Present value of payments $ 184,817.42

Remaining principal $ 55,182.58

Balloon payment $ 368,936.54

Chapter 6
Question 43

Input area:

PV of cash flows $ 6,550

Year Cash flow
1 $ 1,700
2 $ -
3 $ 2,100
4 $ 2,800

Discount rate 10%

Output area:

Year PV
1 $ 1,545.45
2 $ -
3 $ 1,577.76
4 $ 1,912.44
Total $ 5,035.65

PV of missing CF $ 1,514.35

Value of missing CF $ 1,832.36

Chapter 6
Question 44

Input area:

First payment $ 1,000,000

Annual increase $ 500,000

Discount rate 9%

Output area:

Year Payments Present Value

0 $ 1,000,000 $ 1,000,000.00
1 1,500,000 $ 1,376,146.79
2 2,000,000 $ 1,683,359.99
3 2,500,000 $ 1,930,458.70
4 3,000,000 $ 2,125,275.63
5 3,500,000 $ 2,274,759.85
6 4,000,000 $ 2,385,069.31
7 4,500,000 $ 2,461,654.10
8 5,000,000 $ 2,509,331.40
9 5,500,000 $ 2,532,352.79
10 6,000,000 $ 2,534,464.84
Present value $ 22,812,873.40
Chapter 6
Question 45

Input area:

Number of years 30
Percentage of pruchase price 80%
Price of warehouse $ 2,900,000
Monthly payment $ 15,000

Output area:

Amount of loan $ 2,320,000

Interest rate per month 0.560%

APR 6.72%

EAR 6.93%
Chapter 6
Question 46

Input area:

Selling price $ 165,000

# of years until sale 4
Production cost $ 94,000
Discount rate 13.0%

Output area:

Present value of sale $ 101,197.59

Profit (loss) $ 7,197.59

Breakeven rate 15.10%

Chapter 6
Question 47

Input area:

Annual payment $ 4,000

Discount rate 10%
Year of first payment 8
Year of last payment 25

Output area:

PV at beginning of payments $ 32,805.65

Value today $ 16,834.48

Chapter 6
Question 48

Input area:

Monthly payment $ 1,500

# of years 15

Interest rate 1 11%

# of years 7

Interest rate 2 7%
# of years 8

Output area:

Value today of interest rate 1 payments $ 87,604.36

Value of interest rate 2 payments at rate change $ 110,021.35

Value today of interest rate 2 payments $ 51,120.33

Total present value of the annuity $ 138,724.68

Chapter 6
Question 49

Input area:

Investment A:
# of years 15
Monthly payment $ 1,200
Interest rate 8.50%

Investment B:
# of years 15
Interest rate 8%

Output area:

Future value of investment A $ 434,143.62

Lump sum needed $ 130,761.55

Chapter 6
Question 50

Input area:

Interest rate 6.2%

Year to find value 7
Amount of payment $ 3,500
Year of first perpetual payment 15

Output area:

Present value of perpetual stream $ 56,451.61

Present value at requested year $ 37,051.41

Chapter 6
Question 51

Input area:

Quoted interest rate 16%

Amount borrowed $ 25,000
Interest per year $ 4,000
Monthly payment $ 2,416.67
Periods/year 12

Output area:

Monthly rate 2.361%

APR 28.33%

EAR 32.31%
Chapter 6
Question 52

Input area:

# of years 5
Amount of semiannual payment $ 7,000
# of years until first payment 8.50
Discount rate 10%
Compounding periods per year 12
Year to find present value -

Output area:

Semiannual interest rate 5.105%

PV of annuity at year 8 $ 53,776.72

Effective annual rate 10.47%

Present value at requested year $ 24,243.67

 Chapter 6
Question 53

Input area:

Annual payment $ 10,000

# of years 5
Discount rate 11%

Output area:

a) PV of ordinary annuity $ 36,958.97

PV of annuity due $ 41,024.46

b) FV of ordinary annuity $ 62,278.01

FV of annuity due $ 69,128.60
Chapter 6
Question 54

Input area:

Value of lease contract $ 68,000

# of months 60
APR 7.85%

Output area:

Monthly payment $1,364.99

Chapter 6
Question 55

Input area:

Loan amount $ 42,000

Interest rate 8%
Loan term 5

Output area:

Loan payment $10,519.17

Year Beginning balance Total payment Interest paid

1 $ 42,000.00 $ 10,519.17 $ 3,360.00
2 34,840.83 10,519.17 2,787.27
3 27,108.92 10,519.17 2,168.71
4 18,758.47 10,519.17 1,500.68
5 9,739.97 10,519.17 779.20

Total interest paid over life of loan = $ 10,595.86

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 0.00
Chapter 6
Question 56

Input area:

Loan amount $ 42,000

Interest rate 8%
Loan term 5

Output area:

Loan payment $8,400.00

Year Beginning balance Total payment Interest paid

1 $ 42,000.00 $ 11,760.00 $ 3,360.00
2 33,600.00 11,088.00 2,688.00
3 25,200.00 10,416.00 2,016.00
4 16,800.00 9,744.00 1,344.00
5 8,400.00 9,072.00 672.00

Total interest paid over life of loan = $ 10,080.00

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 30

Monthly retirement income $ 20,000
Years in retirement 25
Years until cabin purchase 10
Cabin price $ 380,000
Inheritance $ 900,000
Monthly savings for first years $ 2,500
Pre-retirement EAR 10%
Retirement EAR 7%

Output area:

Pre-retirement APR 9.57%

Retirement APR 6.78%

Savings value until cabin purchase $ 499,659.64

Savings after cabin purchase $ 119,659.64

FV of initial savings $ 805,010.23

PV of retirement spending $ 2,885,496.45

PV of inheritance $ 165,824.26

Amount needed at retirement $ 3,051,320.71

Retirement shortfall $ 2,246,310.48

Savings needed per month $ 3,127.44

Chapter 6
Question 58

Input area:

Years for lease 3

Car price $ 32,000
Payment today $ 99
Monthly lease payment $ 450
Loan rate 7%
Resale price $ 23,000

Output area:

PV of lease payments $ 14,672.91

PV of resale price $ 18,654.82

PV of purchase $ 13,345.18

You should Buy

the car since the PV is lower.

Breakeven present value $ 17,327.09

Breakeven resale price $21,363.01

Chapter 6
Question 59

Input area:

Year
0 $ 7,000,000
1 $ 4,500,000
2 $ 5,000,000
3 $ 6,000,000
4 $ 6,800,000
5 $ 7,900,000
6 $ 8,800,000

Requested signing bonus $ 9,000,000

Requested salary increase $ 1,400,000
Interest rate 5.5%
Compunding periods 365

Output area:

EAR 5.65%

PV of salary offer $ 38,610,482.57

PV of salary with increase $ 40,010,482.57

Effective quarterly interest rate 1.384%

Quarterly salary $1,527,463.76

Chapter 6
Question 60

Input area:

Amount of loan $ 25,000

# of years 1
APR 15%

Output area:

Amount received $ 21,250.00

EAR 17.65%
Chapter 6
Question 61

Input area:

Salary for 2 years ago $ 47,000

Last year's salary $ 50,000
Future salary $ 55,000
Years for future salary 5
Pain and suffering $ 100,000
Court costs $ 20,000
EAR 8%

Output area:

APR 7.72%

Value 1 year ago of salary 2

years ago $ 48,699.39
Value today of salary 2 yrs ago $ 52,595.34
Value today of last year's salary $ 51,807.86
Value of next 5 year's salary $ 227,539.14

Total value awarded $ 451,942.34

Chapter 6
Question 62

Input area:

Amount of loan $ 10,000

# of years 1
APR 8%
Points 3%

Output area:

EAR 11.34%
Chapter 6
Question 63

Input area:

Amount of loan $ 10,000

# of years 1
APR 11%
# of points 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 30
Amount of loan $ 240,000
Interest rate 6.80%
Fees $ 2,300

Output area:

Refundable fee:
Monthly payment $ 1,579.61
Monthly interest 0.5745%
APR 6.89%
EAR 7.12%

Nonrefundable fee:
APR 6.80%
EAR 7.02%
Chapter 6
Question 65

Input area:

Amount of loan $ 1,000

# of years 3
Interest rate 14%

Output area:

Total repayment $ 1,481.54

Monthly payment $ 41.15
Monthly interest 2.30%

APR 27.61%
EAR 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 30

Annual withdrawal $ 105,000
# of years to withdraw 20
Interest rate 7%

Employer contribution $ 1,500

Trust fund distribution $ 150,000
Years until distribution 20

Output area:

a. Present value of withdrawals $ 1,112,371.50

Annual deposit until retirement $ 11,776.01

b. Present value in lump sum $ 146,129.04

c. Future value of trust fund deposit $ 295,072.70

Total annual deposit necessary $ 8,652.25

Friend's annual deposit $ 7,152.25

Chapter 6
Question 67

Input area:

Amount of debt $ 10,000

Interest rate on current card 19.8%
Interest rate on new card 6.2%
Planned monthly payment $ 200
Transfer fee 2%

Output area:

# of months to pay off current card 106.50

# of months to pay of new card 57.99
Difference 48.51

Amount of bill with fees $ 10,200

# of months with fees 59.35
Chapter 6
Question 68

Input area:

Payout at retirement $ 500,000

# of years until retirement 65

Year Payment
1 $ 900
2 900
3 1,000
4 1,000
5 1,100
6 1,100

Interest rate 1 12%

# of years 6

Interest rate 2 8%
# of years 59

Output area:

Year Value at Year 6

1 $ 1,586.11
2 $ 1,416.17
3 $ 1,404.93
4 $ 1,254.40
5 $ 1,232.00
6 $ 1,100.00
Total value at year 6 $ 7,993.60

Total value at year 65 $ 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 $ 4,049.81

Value of payment from

insurance company $ 2,701.84

Either way, we still choose the same policy.

Chapter 6
Question 69

Input area:

Amount of loan $ 750,000

APR 8.1%
# of years 30
# of years until balloon payment 8

Output area:

Monthly payment $ 5,555.61

# of payments left after balloon payment 264

Total amount of balloon payment $ 683,700.32

Chapter 6
Question 70

Input area:

Annual payment $ 9,000

# of years 6

Annual payout $ 20,000

# of years 4

Output area:

Year Cash flow

1 $ (9,000)
2 $ (9,000)
3 $ (9,000)
4 $ (9,000)
5 $ (9,000)
6 $ (9,000)
7 $ 20,000
8 $ 20,000
9 $ 20,000
10 $ 20,000

Breakeven rate 8.07%

Chapter 6
Question 71

Input area:

Plan X:
Annual payment $ 20,000
# of years In perpetuity

Plan Y:
Annual payout $ 28,000
# of years 20

Output area:

Discount rate needed 6.46%

 Chapter 6
Question 72

Input area:

Biannual payment $ 15,000

APR 10%
Compunding periods 365
b. Payments begin in (yrs) 4

Output area:

a. EAR 10.52%
Effective 2-year rate 22.14%

Present value of perpetuity $ 67,760.07

Value today $ 74,885.44

b. Value today $ 55,478.78

Chapter 6
Question 73

Input area:

Present value of annuity = $C + $C + + $C

(1 + r) (1 + r)^2 (1 + r)^N

Present value of annuity due = $C + $C ++ $C

(1 + r) (1 + r)^(N-1)

Present value of annuity due = (1 + r) $C + + $C

(1 + r) (1 + r)^N

= (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 40

Next year's salary $ 40,000
Salary growth rate 3%
Investment return 11%
Desired retirement value $ 2,000,000

Output area:

PV of retirement value $ 30,768.82

Amount to save next year $ 2,591.56

Pecentage of salary 6.48%

 Chapter 6
Question 75

Input area:

Weekly interest rate 7%

# of weeks 1
c. Loan amount $ 100
Loan proceeds $ 68.92
Loan payments $ 25.00

Output area:

a. APR 364.00%
EAR 3272.53%

b. Weekly rate 7.53%

APR 391.40%
EAR 4253.98%

c. Weekly rate 16.75%

APR 871.00%
EAR 314215.72%