Practice math

1. You have $2,500 you want to invest in your classmate’s start-up business. You believe the
business idea to be great and hope to get $3,700 back at the end of three years. If all goes
according to plan, what will be the return on your investment?

2. What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this
was an annuity due, what would its future value be?

3. Ramesh Abdul wishes to choose the better of two equally costly cash flow streams: annuity

X and annuity Y. X is an annuity due with a cash inflow of $9,000 for each of 6 years. Y is an

ordinary annuity with a cash inflow of $10,000 for each of 6 years. Assume that Ramesh can

earn 15% on his investments.

a. Find the future value at the end of year 6 for both annuities.

b. Use your finding in part a to indicate which annuity is more attractive. Why?

4. You are in desperate need of cash and turn to your uncle, who has offered to lend you some
money. You decide to borrow $1,300 and agree to pay back $1,500 in two years. Alternatively,
you could borrow from your bank that is charging 6.5 percent interest annually. Should you go
with your uncle or the bank?

3.

4.
6. Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment.
The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments
beginning next June 30.