Chapter 5 (PART 1)

Question 1

Rahman wanted to buy a Toyota Corolla. The car cost RM85,000 today,and thinking of
buying the car once he has enough money. However, the price shows that it will increase by
6% per year.

a. How much the price of the car will be in 5 years?

PV = 85,000
I/Y = 6
N=5
FV = ?

FV = RM 113,749.17

b. If he were to save now at a prevailing interest rate of 10%, how much would he
have to save every year to buy the car for the next 5 years?

I/Y = 10
N=5
FV = 113.749.17
PMT = ?

PMT = RM 18,631.83

c. Do a) and b) again if the value of the car shrank by 5% per year.

a) If value of car shrank by 5% per year

PV = 85,000
I/Y = - 5%
N=5
FV = ?

FV = RM 65,771.38

b) I/Y = 10
N=5
FV = 65,771.38
PMT = ?

PMT = RM 10,773.19
Question 2

Your daughter is about to start secondary education at a private school within the next 5
years. Tuition is expected RM10,000 per year, payable at the beginning of the school year.
You expect your daughter will spend 6 years at the private school.

Assuming the interest rate is 5 percent for the entire period.

a. How much do you have to deposit into the bank every year for the next five years so
that enough funds are accumulated at the end of the fifth year to finance the rest of
the 6-year education?

1) How much needed for the 6-year education?

*Annuity due (BEG)

PMT = 10,000 (BEG)

I/YR = 5
N=6
PV = ?

PV = RM 53,294.77

2) How much have to deposit every year to get RM 53,294.77 at the end?

*Ordinary annuity

FV = 53,294.77
N=5
I/YR = 5
PMT = ?

PMT = RM 9,645.01
Question 3

Jimmy Dean wanted to invest in gold now, and the gold is expected to increase in value by
10 percent per year within the next 10 years. However, he does not have enough money
and would like to borrow from his friend, Bijan. He promises to pay Bijan RM1,000 annually
beginning of each period for ten years. The prevailing interest rate for the next 10
years is at 6 percent per annum and compounded annually.

i) How much does Jimmy Dean borrow from Bijan now?

PMT = 1,000 (BEG)

I/Y = 6
N = 10
PV = ?

PV = RM 7,801.69

ii) What is the value of gold in the next 10 years?

PV = 7,801.69
I/Y = 10
N = 10

FV = RM 20,235.57
Question 4

John Wick is 50 years old and has saved nothing for retirement. However, he has just
inherited RM160,000 from his great grandfather and wants to invest in a retirement plan.

He plans to put the money in an investment account, earning a 10% return. He will let the
money accumulate for 16 years when he will retire at age 66.

After that, he would like to deposit enough money to begin making withdrawals of RM
50,000 per year starting at age 67 and continuing for 24 additional years when he turns
92. He wants the balance in his account after the last withdrawal to be RM 0.

After investing in his retirement plan, John wants to spend the rest of his money on a
world tour.

a. How much money must John invest in the retirement plan from his great
grandfather's inheritance to achieve his goal?

Deposit how much to begin making withdrawals starting age 67

PMT = - 50,000
N = 25
I/Y = 10
FV = 0
PV = ?

PV = RM 453,852

b. Suppose John has changed his mind and invests the entire inheritance into
the account, earning 10%. After making his last withdrawal at age 92, he wants
to leave the remaining money to his niece. How much would his niece receive
when John withdraws the final annual instalment of RM50,000?

i) After 16 years

PV = 160,000
I/Y = 10
N = 16

FV = RM 735,195.68

ii) Withdrawals

PV = 735,195.68
PMT = - 50,000
I/Y = 10
N = 25
 FV = RM 3,048,276.03

Question 5

Roger deposit RM9,000 into account earnings 6% per annum. After 4 years, he made
another deposit into the same account. At the end of 6 years, the account balance is
RM20,000. What was the amount deposited at the end of the 4th year?