Chapter 4 CFIN6

Chapter 4 Solutions

(Most solutions are rounded in the final answers, not in the intermediate computations.)

0 1 2 3 4
r = 4%
4-1
-700 FV = ?

FV4 = $700(1.04)4 = $700(1.16986) = $818.90

Using a financial calculator, enter N = 4, I/Y= 4, PV = -700, and PMT = 0; compute FV = 818.90

0 1 2 14 15
r = 6% …
4-2
-2,500 FV = ?

FV15 = $2,500(1.06)15 = $2,500(2.39656) = $5,991.40

Using a financial calculator, enter N = 15, I/Y= 6, PV = -2,500, and PMT = 0; compute FV = 818.90

0 1 2 14 20 Interest payments
r = 12% …
4-3 a.
-500 FV = ?

FV20 = $500(1.12)20 = $500(9.64629) = $4,823.15

Using a financial calculator, enter N = 20, I/Y= 12, PV = -500, and PMT = 0; compute FV = 4,823.15

0 1 2 79 80 Interest payments
r = 3% …
b.
-500 FV = ?

FV20 = $500(1.03)80 = $500(10.64089) = $5,320.45

Using a financial calculator, enter N = 20 x 4 = 80, I/Y= 12/4 = 3, PV = -500, and PMT = 0; compute FV =
5,320.45

0 1 2 239 240 Interest payments

r = 1%
c. …
-500 FV = ?

FV20 = $500(1.01)240 = $500(10.89255) = $5,446.28

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Chapter 4 CFIN6

Using a financial calculator, enter N = 20 x 12 = 240, I/Y= 12/12 = 1, PV = -500, and PMT = 0; compute
FV = 5,446.28

4-4 Staci’s investment:

0 1 2 59 60 Interest payments
r = 0.6% …
-950 FV = ?

FV5 = $950(1.006)60 = $950(1.43179) = $1,360.20

Using a financial calculator, enter N = 5 x 12 = 60, I/Y= 7.2/12 = 0.6, PV = -950, and PMT = 0; compute
FV = 1,360.20

Shelli’s investment:

0 1 2 19 20 Interest payments
r = 2% …
-900 FV = ?

FV5 = $900(1.02)20 = $900(1.48595) = $1,337.35

Using a financial calculator, enter N = 5 x 4 = 20, I/Y= 8/4 = 2, PV = -900, and PMT = 0; compute FV =
1,337.35

0 1 2 13 14 Interest payments
r = 5%
4-5 a. …
PV = ? FV14 = 1,500

PV = $1,500/(1.05)14 = $1,500(0.505068) = $757.60

Using a financial calculator, enter N = 14, I/Y= 5, PMT = 0, and FV = 1,500; compute
PV = -757.60

0 1 2 13 14 Interest payments
r = 10%
b. …
PV = ? FV14 = 1,500

PV = $1,500/(1.10)14 = $1,500(0.263331) = $395.00

Using a financial calculator, enter N = 14, I/Y= 10, PMT = 0, and FV = 1,500; compute
PV = -395.00

In this problem, we showed that if a person wants an investment to be worth $1,500 in 14 years and the
opportunity cost rate was 5 percent, he or she would have to invest $757.60 today. On the other hand, if
the opportunity cost rate was 10 percent, more interest would be earned over the 14-year investment
period, which means that the investor would only need to invest $395 today to end up with $1,500 in 14

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Chapter 4 CFIN6

years. Simply stated, the more interest you can earn during an investment period, the less you need to
invest today to receive a particular amount in the future.

0 1 2 11 12 Interest payments
r = 7%
4-6 …
PV = ? FV12 = 12,500

PV = $12,500/(1.07)12 = $12,500(0.444012) = $5,550.15

Using a financial calculator, enter N = 12, I/Y= 7, PMT = 0, and FV = 12,500; compute
PV = -5,550.15

0 1 2 3 4 5 Interest payments
r = 9%
4-7 a.
PV = ? FV5 = 2,500

PV = $2,500/(1.09)5 = $2,500(0.649931) = $1,624.83

Using a financial calculator, enter N = 5, I/Y= 9, PMT = 0, and FV = 2,500; compute

PV = -1,624.83

0 1 2 19 20 Interest payments
r = 2.25% …
b.
PV = ? FV5 = 2,500

PV = $2,500/(1.0225)20 = $2,500(0.640816) = $1,602.04

Using a financial calculator, enter N = 5 x 4 = 20, I/Y= 9/4 = 2.25, PMT = 0, and FV = 2,500; compute PV
= -1,602.04

0 1 2 59 60 Interest payments
r = 0.75% …
c.
PV = ? FV5 = 2,500

PV = $2,500/(1.0075)60 = $2,500(0.638700) = $1,596.75

Using a financial calculator, enter N = 5 x 12 = 60, I/Y= 9/12 = 0.75, PMT = 0, and FV = 2,500; compute
PV = -1,596.75

The more interest you can earn during an investment period, the less you need to invest today to receive
a particular amount in the future. Everything else equal, more interest is earned when more compounding
occurs. Stated differently, when more compounding occurs, the effective annual rate of return on an
investment is greater, which means more interest is earned.

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Chapter 4 CFIN6

0 1 2 35 36
r = 1% …
4-8
PV = ? FV3 = 22,000

PV = $22,000/(1.01)36 = $22,000(0.698925) = $15,376.35

Using a financial calculator, enter N = 3 x 12 = 36, I/Y= 12/12 = 1, PMT = 0, and FV = 22,000; compute
PV = -15,376.35

0 1 2 3 4 5 6 7 8
r = 7%
4-9 a.
-385 -385 -385 -385 -385 -385 -385 -385
FVA8 = ?

 (1.07)8 - 1
FVA = 385   = 385(10.259803) = 3,950.02
 0.07 
Using a financial calculator, enter N = 8, I/Y= 7, PV = 0, and PMT = -385, compute FV = 3,950.02

0 1 2 3 4 5 6 7 8
r = 7%
b.
-385 -385 -385 -385 -385 -385 -385 -385
FVA(DUE)8 = ?

  (1.07)8 - 1 
FVA(DUE) = 385    × (1.07)  = 385(10.977989) = 4, 226.53
  0.07  
Using a financial calculator, “flip the switch” to BGN, enter N = 8, I/Y= 7, PV = 0, and PMT = -385, compute
FV = 4,226.53

0 1 2 3 4 5 13 14
r = 8% …
4-10 a.
-450 -450 -450 -450 -450 -450 -450
FVA14 = ?

 (1.08)14 - 1
FVA = 450   = 450(24.214920) = 10,896.71
 0.08 
Using a financial calculator, enter N = 14, I/Y= 8, PV = 0, and PMT = -450, compute FV = 10,896.71

0 1 2 3 4 5 13 14
r = 8% …
b.
-450 -450 -450 -450 -450 -450 -450
FVA(DUE)14 = ?

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Chapter 4 CFIN6

  (1.08)14 - 1 
FVA(DUE) = 450     (1.08)  = 450(26.152114) = 11,768.45
  0.08  
Using a financial calculator, “flip the switch” to BGN, enter N = 14, I/Y= 8, PV = 0, and PMT = -450, compute
FV = 11,768.45

0 1 2 3 4 5 59 60
r = 0.5% …
4-11 a.
-100 -100 -100 -100 -100 -100 -100
FVA = ?
 (1.005) - 1
60
FVA = 100   = 100(69.770031) = 6,977.00
 0.005 
Using a financial calculator, enter N = 5 x 12 = 60, I/Y= 6/12 = 0.5, PV = 0, and PMT = -100; compute FV
= 9,977

0 1 2 3 4 5 59 60
r = 0.5% …
b.
-100 -100 -100 -100 -100 -100 -100
FVA(DUE) = ?

  (1.005)60 - 1 
FVA(DUE) = 100     (1.005)  = 100(70.118881) = 7,011.89
  0.005  
Using a financial calculator, “flip the switch” to BGN, enter N = 60, I/Y= 0.5, PV = 0, and PMT = -100;
compute FV = 7,011.89

0 1 2 3 4 5 14 15
r = 11% …
4-12 a.
PVA = ? 230 230 230 230 230 230 230

1- 1 15 
PVA = 230 
(1.11) 
= 230(7.190870) = 1, 653.90
 0.11 
 
Using a financial calculator, enter N = 15, I/Y= 11, PMT = 230, and FV = 0; compute PV = 1,653.90

0 1 2 3 4 5 14 15
r = 11% …
b.
230 230 230 230 230 230 230
PVA(DUE) = ?

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Chapter 4 CFIN6

 1- 1  
  (1.11)15  
PVA(DUE) = 230   (1.11)  = 230(7.981865) = 1,835.83
 0.11 
 
  
Using a financial calculator, “flip the switch” to BGN, enter N = 15, I/Y= 11, PMT = 230, and FV = 0; compute
PV = 1,835.83

0 1 2 3 4 5 107 108
r = 0.7% …
4-13 a.
PVA = ? 450 450 450 450 450 450 450

1- 1 
 (1.007)108 
PVA = 450 = 450(75.602985) = 34,021.34
 0.007 
 
Using a financial calculator, enter N = 9 x 12 = 108, I/Y= 8.4/12 = 0.7, PMT = 450, and FV = 0; compute
PV = -34,021.34

0 1 2 3 4 5 107 108
r = 0.7% …
b.
450 450 450 450 450 450 450
PVA(DUE) = ?

 1- 1  
  (1.007)108  
PVA(DUE) = 450   (1.007)  = 450(76.132206) = 34, 259.49
 
  0.007  
  
Using a financial calculator, “flip the switch” to BGN, enter N = 108, I/Y= 0.7, PMT = 450, and FV = 0;
compute PV = -34,259.49

0 1 2 3 4 5 179 180
r = 0.6% …
4-14 a.
PVA = ? 150 150 150 150 150 150 150

1- 1
180

PVA = 150  (1.006)  = 150(109.884466) = 16, 482.67
 0.006 
 
Using a financial calculator, enter N = 15 x 12 = 180, I/Y=7.2/12 = 0.6, PMT = 150, and FV = 0; compute
PV = -16,482.67

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Chapter 4 CFIN6

0 1 2 3 4 5 179 180
r = 0.6% …
b.
150 150 150 150 150 150 150
PVA(DUE) = ?

 1- 1  
  (1.006)180  
PVA(DUE) = 150   (1.006)  = 150(110.543773) = 16,581.57
 0.006 
 
  
Using a financial calculator, “flip the switch” to BGN, enter N = 180, I/Y= 0.6, PMT = 150; and FV = 0;
compute PV = 16,581.57

0 1 2 3
r = 7.5%
4-15 a.
PVCF3 = ? 500 400 300

500 400 300

PVCF = +  = 500(0.930233) + 400(0.865333) + 300(0.804961)
(1.075)1 (1.075)2 (1.075)3

= 465.12 + 346.13 + 241.49 = 1,052.74

Using the cash flow register on a financial calculator, enter CF0 = 0, CF1 = 500, CF2 = 400, CF3 = 300, and
I = 7.5; compute NPV = 1,052.74

0 1 2 3
r = 7.5%
b.
500 400 300

500 400 300

PVCF = 0
+ 1
 = 500(1.000000) + 400(0.930233) + 300(0.865333)
(1.075) (1.075) (1.075)2

= 500.00 + 372.09 + 259.60 = 1,131.69

Using the cash flow register on a financial calculator, enter CF0 = 500, CF1 = 400, CF2 = 300, and I = 7.5;
compute NPV = 1,131.69

0 1 2 3
r = 7.5%
4-16 a.
500 400 300
FVCF3 = ?
2 1 0
FVCF = 500(1.075) + 400(1.075) + 300(1.075)

= 500(1.155625) + 400(1.075000) + 300(1.000000)

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Chapter 4 CFIN6

= 577.81 + 430.00 + 300.00 = 1,307.81

Using the cash flow register on a financial calculator, enter CF0 = 0, CF1 = 500, CF2 = 400, CF3 = 300, and
I = 7.5; compute NPV = 1,052.74, and then compute the future value of the NPV—that is, FV =
1,052.74(1.075)3 = 1,307.82 (rounding)

0 1 2 3
r = 7.5%
b.
500 400 300

3 2 1
FVCF = 500(1.075) + 400(1.075) + 300(1.075)

= 500(1.242297) + 400(1.155625) + 300(1.075000)

= 621.15 + 462.25 + 322.50 = 1,405.90

Using the cash flow register on a financial calculator, enter CF0 = 500, CF1 = 400, CF2 = 300, and I = 7.5;
compute NPV = 1,131.69, and then compute the future value of the NPV—that is, FV = 1,131.69(1.075)3
= 1,405.89 (rounding)

0 1 2 3 4 5 -1 
r = 4% …
4-17 a.
PVP = ? 320 320 320 320 320 320 320

320
PVP = = 8,000.00
0.04

0 1 2 3 4 5 -1 
r = 8% …
b.
PVP = ? 320 320 320 320 320 320 320

320
PVP = = 4,000.00
0.08

0 1 2 3 4 5 -1 
r = 10% …
c.
PVP = ? 320 320 320 320 320 320 320

320
PVP = = 3, 200.00
0.10

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Chapter 4 CFIN6

When more interest is earned during an investment period, less money must be invested today to
receive a particular amount in the future.

0 1 2 8 9 10
r=? …
4-18
-1,250 3,550

 1 
FV  PV  n
 (1 r) 

 1 
3,550 1,250  10 
 (1 r) 
1
 3,550  10
r   1 (2.8400)0.10 1 0.1111.0%
 1,250 

Using a calculator, enter N = 10, PV = -1,250, PMT = 0, and FV = 3,550; compute I/Y= 11%.

4-19 0 1 2 n-1 n Months

r = 0.4%
…
12,000 -526 -526 -526 -526

1  1 n 
PVA  PMT  
(1r )
 r 
  Use either the trial-and-error
method or a financial
1 1 n  calculator to solve for n.
12,000  526  
(1.004)
 0.004 
 

Using a calculator, enter I/Y= 0.4, PV = 12,000, FV = 0, and PMT = -526; compute N = 23.97 ≈ 24
months, which equals two (2) years.

4-20 0 1 2 n-1 n Years

r = 7%%
…
-2,260 4,750

FV  PV(1 r)n Solve for n using logarithms,

the trial-and-error method, or
4,750  2,260(1.07)n a financial calculator.

Using a calculator, enter I/Y= 7, PV = -2,260, PMT = 0, and FV = 4,750; compute N = 10.98 ≈ 11 years.

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Chapter 4 CFIN6

Alternative solution (using logarithms):

4,750  2,260(1.07)n

4,750
(1.07)n   2.10177
2,260

ln[(1.07)n ]  ln(2.10177)

Because ln[(1.07)n] = n[ln(1.07)], the solution is as follows:

n[ln(1.07)]  ln(2.10177)

ln(2.10177) 0.74278
n  10.98
ln(1.0700) 0.06766

4-21 rEAR = (1 + r/m)m – 1.0

CanAm: rEAR = [1 + (0.12/12)]12 – 1.0 = (1.01)12 – 1.0 = 0.1268 = 12.68%

UniMex: rEAR = [1 + (0.1225/2)]2 – 1.0 = (1.06125)2 – 1.0 = 0.1263 = 12.63%

CanAm Financial offers the higher effective annual return.

4-22 a. APR = 6.0%

b. rEAR = [1 + (0.06/12)]12 – 1.0 = (1.005)12 – 1.0 = 0.0617 = 6.17%

4-23 a. 0 1 2 119 120 Months

r = 0.35%
…
PVA = 50,000 PMT PMT PMT PMT

 1 1 
 (1.0035)120   PMT(97.848914)
PVA  50,000  PMT
 0.0035 
 
50,000
PMT   510.99  511
97.848914

Calculator solution: N = 120, I/Y= 4.2/12 = 0.35, PV = 50,000, and FV = 0; PMT = ? = -510.99.

b. After three years of payments, William is faced with the following cash flow timeline:

0 1 2 83 84 Months
r = 0.35%
…
PVA = ? 511 511 511 511
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Chapter 4 CFIN6

 1 1 
 (1.0035)84 
PVA  510.99
 0.0035 
 

 510.99(72.668817)  37,133.04

Calculator solution: N = 84, I/Y= 4.2/12 = 0.35, PMT = 510.99, and FV = 0; PV = ? = -37,133.04

4-24 a. 0 1 2 359 360 Months

r = 0.5%
…
PVA = 220,000 PMT PMT PMT PMT

 1 1 
 (1.005)360   PMT(166.791614)
PVA  220,000  PMT
 0.005 
 

220,000
PMT  1,319.01
166.791614

Calculator solution: N = 360, I/Y= 6/12 = 0.5, PV = 220,000, and FV = 0; PMT = ? = -1,319.01.

b. Because it is 12 years after she bought the house, Sarah Jean has 216 = (30 – 12) x 12 payments
remaining and she is now faced with the following cash flow timeline:

0 1 2 215 216 Months

r = 0.5%
…
PVA = ? 1,319 1,319 1,319 1,319

 1 1 
 (1.005)216 
PVA 1,319.01
 0.005 
 
1,319.01(131.897876) 173,974.62

Calculator solution: N = 216, I/Y= 6/12 = 0.5, PMT = 1,319.01, FV = 0; PV = ? = -173,974.62

This is an ordinary annuity because Sarah Jean made her most recent mortgage payment today,
which means her next payment is due in one month, not today.

4-25 a. 0 1 2 59 60 Months
r = 0.25%
…
PVA = 32,000 PMT PMT PMT PMT

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accessible website, in whole or in part.
Chapter 4 CFIN6

 1 1 
 (1.0025)60   PMT(55.652358)
PVA  32,000  PMT
 0.0025 
 
32,000
PMT   575.00
55.652358

Calculator solution: N = 60, I/Y= 3/12 = 0.25, PV = 32,000, and FV = 0; PMT = ? = -575.00

b. After making 24 payments, Nona would have 36 payments remaining and she would be faced with
the following cash flow timeline:

0 1 2 35 36 Months
r = 0.25%
…
PVA = ? 575 575 575 575

 1 1 
 (1.0025)36 
PVA  575
 0.0025 
 
 575(34.386465) 19,772.22

Calculator solution: N = 36, I/Y= 3/12 = 0.25, PMT = 575, FV = 0; PV = ? = -19,772.22

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