FIN202_CHAP 5: PRACTICE

INTERMEDIATE:

5.21 Multiple compounding periods: Find the present value of $3,500 under each of

the following rates and periods:

a. 8.9 percent compounded monthly for five years.

b. 6.6 percent compounded quarterly for eight years.

c. 4.3 percent compounded daily for four years.

d. 5.7 percent compounded continuously for three years.

5.26 Time to grow: You have just inherited $550,000. You plan to save this money and

continue to live off the money that you are earning in your current job. If you can invest the

money in a bond that pays 4.6 percent interest annually, how long will it be before your

inheritance is worth $1 million?

5.27 Growth rates: Xenix Corp had sales of $353,866 in 2017. If management expects its

sales to be $476,450 in three years, what is the rate at which the company's sales are

expected to grow?

5.29 Present value: Caroline Weslin needs to decide whether to accept a bonus of $1,820

today or wait two years and receive $2,100 then. She can invest at 6 percent. What should

she do?

5.30 Present value: Congress and the President have decided to increase the federal tax rate

in an effort to reduce the budget deficit. Suppose that Caroline Weslin, from problem 5.29,

will pay 35 percent of her bonus to the federal government for taxes if she accepts the

bonus today and 40 percent if she receives her bonus in two years. Will the increase in tax

rates affect her decision?

ADVANCED:

5.34 When you were born, your parents set up a bank account in your name with an initial

investment of $5,000. You are turning 21 in a few days and will have access to all your

funds. The account was earning 7.3 percent for the first seven years, but then the rates

went down to 5.5 percent for six years. Your account then earned 8.2 percent three years in

a row. Unfortunately, the next two years you earned only 4.6 percent. Finally, as the
economy recovered, the return jumped to 7.6 percent for the last three years.

a. How much money was in your account before the rates went down drastically at the end

of year 16?

b. How much money is in your account now, at the end of year 21?

c. What would be the balance now if your parents made another deposit of $1,200 at the

end of year 7?

5.36 Surmec, Inc., reported sales of $2.1 million last year. The company's primary business is

the manufacture of nuts and bolts. Since this is a mature industry, analysts are confident

that sales will grow at a steady rate of 7 percent per year. The company's net income equals

23 percent of sales. Management would like to buy a new fleet of trucks but can only do so

once the net income reaches $620,000 a year.

a) At the end of what year will Surmec be able to buy the trucks?

b) What will sales and net income be in that year?

5.37 You will be graduating in two years and are thinking about your future. You know that

you will want to buy a house five years after you graduate and that you will want to put

down $60,000. As of right now, you have $8,000 in your savings account. You are also fairly

certain that once you raduate, you can work in the family business and earn $32,000 a year,

with a 5 percent raise every year. You plan to live with your parents for the first two years

FIN202_CHAP 5: PRACTICE

after graduation, which will enable you to minimize your expenses and put away $10,000

each year. The next three years, you will have to live on your own as your younger sister will

be graduating from college and has already announced her plan to move back into the

family house. Thus, you will be able to earn only 13 percent of your annual salary. Assume

that you will be able to earn 7.2 percent on the savings from your salary.

At what interest rate will you need to invest the current savings account balance in order to

achieve

your goal?

Hint:
 Draw a time line that shows all the cash flows for years 0 through 7.

 Remember, you want to buy a house seven years from now and your first salary will

be in year 3.