Self-correction problems

Q-1:

The following cash-flow streams need to be analyzed

Cash flow End of year

stream

1 2 3 4 5
X $100 $200 $200 $300 $300

W 600 ------ ------ ------ ------

Y ----- ------ ------ ------ 1200

Z 200 ------ 500 ------ 300

Req # 1

Year 1 {W}

Data Data Data

PV=300 PV=300 PV=200

I=10% I=10% I=10%

N=0 N=01 N=02

FV5=? FV4=? FV3=?

Formula: Formula: Formula:

FV5=PV (1+i) n=n-t FV4=PV (1+i) n=n-t FV3=PV (1+i) n=n-t

FV5=300ans FV4=330ans FV3=242ans

Data Data

PV=300 PV=100

I=10% I=10%

N=3 N=4

FV2=? FV1=?

Formula: Formula:

FV2=PV (1+i) n=n-t FV1=PV (1+i) n=n-t

FV2=266.2ans FV1=146.41ans

Year 2 {X} Year 3 {Y}

Data Data

PV=600 PV=1200

I=10% I=10%

N=04 N=0

FV1=? FV5=?

Formula: Formula:

FV1=PV (1+i) n=n-t FV5=PV (1+i) n=n-t

FV1=878.46ans FV5=1200Ans
 Year 4 {Z}

Data Data Data

PV=200 PV=500 PV=300

I=10% I=10% I=10%

N=04 N=02 N=0

FV1=? FV3. =? FV1=?

Formula: Formula: Formula:

FV1=PV (1+i) n=n-t FV3=PV (1+i) n=n-t FV5=PV (1+i) n=n-t

FV1=292.82 FV3=605.0 FV5=300

Individual Cash flow received

At the end Of year

Cash flow 1 2 3 4 5 Total future

stream value
W 146041 266.2 242 330 300 1284.61

X 878.86 - - - - 878.86
Y - - - - 1200 1200

Z 292.82 - 605 - 300 1197.82

Req#2

Present value of each cash flow and total present value of each stream (using Table II in the end-of-
book Appendix):

Year 1 {W}
 FV
Formula: PV = n
( 1+ i )

Data Data Data Data Data

FV=100 FV=200 FV=200 FV=300 FV=300

I=14% I=14% I=14% I=14% I=14%

N=1 N=2 N=3 N=4 N=5

PV1=? PV2=? PV3=? PV4=? PV5=?

Formula : Formula : Formula : Formula : Formula :

FV FV FV FV FV
PV = n PV = n PV = n PV = n PV = n
( 1+ i ) ( 1+ i ) ( 1+ i ) ( 1+ i ) ( 1+ i )

PV1=87.71ans PV2=153.89ans PV3=134.99 PV4=177.62Ans PV5=155.81ans

Year 2{X} YEAR 3 {Y}

Data Data

FV=600 FV=1200

I=14% I=14%

N=1 N=5

PV1=? PV5=?

FV FV
Formula : PV = n Formula : PV = n
( 1+ i ) ( 1+ i )

PV1=526.31ans PV5=623.24ans
 Year 4{Z}

Data Data Data

FV=200 FV=500 FV=300

I=14% I=14% I=14%

N=1 N=3 N=5

PV1=? PV3=? PV5=?

FV FV FV
Formula : PV = n Formula : PV = n Formula : PV = n
( 1+ i ) ( 1+ i ) ( 1+ i )

PV1=175.43ans PV3=337.48ans PV5=155.81ans

PV5 for individual cash received recorded

At the end of year

Cash-flow Total
stream present
1 2 3 4 5
value

W 87.71 153.89 134.99 177.62 155.81 710.02

X 523.31 - - - - 523.31

Y - - - - 623.24 623.24
Z 175.43 - 337.48 - 155.81 668.72

Q-2

Req#A Req#B

1st plan 2nd plan

 Data: Data:

PMT=500(semi) PMT=1000

I=7%(semi) I=7.5%

N=10 N=10

FV=? FV=?

Formula: Formula:

FV=PMT [(1+i/m) n*m -1] FV=PMT [(1+i) n-1]

i/m i

FV=14138.571ans FV=14147.08ans

Req#C:

Plan 2 would be preferred by a slight margin –Rs 7.25

Req#D:

Data

PMT=1000

I=7%

N=10

FV=?

Formula: FV=PMT [(1+i) n-1]

FV=13816ans

Now plan 1 would be preferred by a non-trivial Rs 323.37 margin.

Q#3:

Interest rate indifferent b/w two contracts:

 1ST CONTARCT 2ND CONTRACT

Data Data

N=6 N=12

FV=25000 FV=50000

I=? I=?

Formula: FV= (1+i) n

FV= (1+i) n

i=12.25%ans

Q#4

Req#A Req#B

Data Data

PMT=7000 PMT=7000

I=6% I=8%

N=20 N=20

PV=? PV=?

Formula: PV=PMT [1 - 1 ] Formula: PV=PMT [1 - 1 ]

[(1+i)n] [(1+i)n]

i i

PV=80290ans PV=68726ans
Q#5:

Req#A

What is the annual payment that will completely amortize the loan over four years? (You may wish to
round to the nearest dollar.)

Data
PV=10000

I=14%

N=4

PMT=?

Formula: PV=PMT [1 - 1 ]

[(1+i)n]

PMT=3432ans

Req#B

Of each equal payment, what is the amount of interest? The amount of loan principal?

Year installment interest Principle Total amount at year

ended

0 - 14% - 10000
1 3432 1400 2032 7968

2 3432 1115.5 2316.5 5651.5

3 3432 791 2641 3010.5

4 3432 421.5 3010.5 0

Q6
1st step 2nd step
Data Data

N=10% N=10%
N=2 N=20
FV=1000 PMT=476.19
PMT=? PV=?
Formula: FV=PMT [(1+i) n-1] Formula: FV=PMT [(1+i) n-1]
I I
 PMT=476.190 PV=4054.28

Q7
PV=1000
I=7.06%
N=21/3
FV=?
Formula: FV=PV(1+ I ) n
m

FV= 10416.08

Q#8

Data

PMT=76923

N=5%

N=65

FV=?

Formula: FV=PMT [(1+i) n-1]

FV=35,136,888
Our “penny saver” would have been better off by ($35,136,888 − $5,000,000) = $30,136,888 – by
depositing the pennies saved each year into a savings account earning 5 percent compound annual
interest.

Q#9

Req#A

How much (in dollars) of the first year’s payment is principal?

PV=50000

N=10

I=8%

Annual installment=7451.47

P.A=?

Formula: PV*I

I=4000Ans

Formula: A.I-i

Principle amount=3451.47

Req#B

Total installment payments − total principal payments

$74,514.70 − $50,000

Total interest payment = $24,514.70ans