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Investment Questions - Annual Investments, Monthly Payments, Etc.

1. An investment will require a $2.4 million cash outlay to enter and will generate perpetual cash inflows of $135,000 a year. Investors could earn 8 percent elsewhere by taking the same risk. Will this investment generate an economic profit? What is the annual economic profit?

2. If an investment is expected to return of 9.75 percent in the future, a $300,000 investment will grow to how much in 20 years?

3. To buy a retirement home, you will need $270,000 at the end of 16 years. If funds can be invested at an effective return of 8 percent a year, how much must you invest today to have the needed amount?

4. You decide to max-out your annual investment into your Individual Retirement Account and invest $5,000 at the end of each year for the next 22 years. You are frightened by the recent two market declines in the last 12 years and decide to invest in a bond portfolio expected to earn only 4.2% annually (assume annual interest payments at the end of the year). How much will you have at the end of this investment period?

5. You want $750,000 to upgrade your store in 12 years. The treasurer wants to make equal payments at the end of each year into a fund for the purpose of accumulating this amount. If the fund can earn an effective annual return of 6 percent, how much must the company invest at the end of each year?

6. You borrowed $428,000 for the purchase of your new home. This loan carries an annual percentage rate of 4.1 percent. It will be paid off through equal year-end installments, including both principal and interest, over a 15-year period. What is the monthly payment required?

7. A credit card company runs an ad quoting a nominal interest rate of 27 percent on charges. What is the effective interest rate if interest is compounded quarterly? Monthly?

8. You plan to retire in 25 years and can invest to earn 6.85 percent. You estimate that you will need $62,000 at the end of each year for an estimated 30 years after retirement, and you expect to earn 4.5 percent during those retirement years. How much do you need to set aside at the end of each year to accumulate the money necessary for your retirement? (Assume year-end cash flows.)

9. Using the no growth perpetuity formula at the end of Chapter 3, assume that you can receive $17,000 per year forever and that your cost of money is 8.5%. What is this opportunity worth today?

10. Using the constant growth perpetuity formula at the end of Chapter 3, assume that you will receive $18,000 at the end of the first year this cash flow will grow 4.7% annually forever after that. With a cost of money of 9.5 percent, what is this opportunity worth today?

Solution Summary

Annual investments and monthly payments are examined for investments.

$2.19