Chapter 3 Selected Solutions 3-2, 3-12, 3-17, 3-22, 3-25, 3-30

2. Plan: If the shrimp from your Czech and Thai suppliers are of equal quality, you will buy the
shrimp from the supplier who offers you the lowest price. One problem is the Czech supplier
quotes you a price in koruna and the Thai supplier quotes you a price in baht. Since you will have
to convert dollars to either koruna or baht, you will buy the shrimp from the supplier who will
charge you the lowest cost in dollars.

Execute: Czech buyer’s offer in dollars = 2,000,000 CZK/(25.50 CZK/USD) = 78,431.37 USD. Thai
supplier’s offer in dollars = 3,000,000 THB/(41.25 THB/USD) = 72,727.27 USD.

Evaluate: You would buy the shrimp from the Thai supplier because the Thai shrimp are
($78,431 - $72,727) = $5704 less expensive today.

12. Plan: You are presented with three alternative courses of action. You could deposit the $55 you
have today. You could lend the $55 you have today to your friend and use your friend’s promised
payment of $58 in one year as collateral for a loan and get cash today. Or, you could loan the
money to your friend today or deposit in the bank. You should select the alternative that makes
you the best off financially.

Execute: If you deposit the money in the bank today you will have

a.

If you lend the money to your friend for one year and borrow against the promised $58
repayment, then you could borrow

b.

Evaluate: From a financial perspective, you should deposit the money in the bank, as it will
result in more money for you at the end of the year.
17. Plan: To value the future store credit, you can determine its present value. The net cost
of the extended warranty is, thus, its price today minus the present value of the future credit.

Execute:

a.

b. Net cost

Evaluate: Given the assumptions, the net cost of the warranty is $100.84 after considering the
future store credit. Note, though, that if you were unlikely to use the future store credit or if you
were likely to forget about it, then the net cost of the warranty would be the full $399.

22. Plan: You must first compute the FV and then subtract the initial investment and the simple
interest, which is simply 8% of $1000 per year ($80).

Execute:
a. The balance after 3 years is $1259.71; interest on interest is $19.71.
FV = 1000(1.08)3 = $1259.71, simple interest is 8% ($80) per year = $240, so interest on
interest is $259.71 - $240.00 = $19.71.
b. The balance after 25 years is $6848.48; interest on interest is $3848.48.
FV = 1000(1.08)25 = $6848.48, simple interest is 25  $80 = $2000, and initial investment is
$1000, so interest on interest is $6848.48 - $2000.00 - $1000.00 = $3848.48.

Evaluate:

As time progresses, the interest on interest becomes increasingly important, dwarfing the simple interest
(which represents the interest on your initial investment).
25. Plan: You are being offered a choice between $5000 today and $10,000 in 10 years. One way to
evaluate this decision is determine how much the $10,000 in 10 years is worth today. In this
way we can compare the $5000 today against the present value of the $10,000 in 10 years.

Execute:

0 1 2 3 4 10

PV = ? 10,000

N I/Y PV PMT FV Excel Formula

Given: 10 7.00% 0 -10,000
Solve for PV: 5083.49 =PV(0.07,10,0,-10000)

Evaluate: The 10,000 in 10 years is worth $5083.49 today. It is preferable to the $5000 payment today
because it is worth more.

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30. a. 5000(1.09) = 186,587.66
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b. 5000(1.09) = 78,816.64