# Basic concepts in Finance

1.16 At an interest rate of 8% per year, $10,000 today is equivalent to how much (a) 1 year from now and (b) 1 year ago?

1.20 Certain certificates of deposits accumulate interest at 10% per year simple interest. if a company invests $240,000 now in these certificates for the purchase of a new machine 3 years from now, how much will the company have at the end of the 3 year period?

1.38 Identify the following as cash inflows or outflows to Daimler Chrysler: income taxes, loan interest, salvage value, rebates to dealers, sales revenues, accounting services, cost reductions.

1.41 Use the rule of 72 to estimate the time it would take for an initial investment of $10,000 to accumulate to $20,000 at a compound rate of 8% per year.

2.2 The U.S. Border Patrol is considering the purchase of a new helicopter for aerial surveillance of the New Mexico-Texas border with Mexico. A similar helicopter was purchased 4 years ago at a cost of $140,000. At an interest rate of 7% per year, what would be the equivalent value today of that $140,000 expenditure?

2.12 V-Tek systems is a manufacturer of vertical compactors, and it is examining its cash flow requirements for the next 5 years. The company expects to replace office machines and computer equipment a various times over the 5-year planning period. Specifically, the company expects to spend $9000 two years from now, $8000 three years from now, and $5000 five years from now. What is the present worth of the planned expenditures at an interest rate of 10% per year?

2.18 How much money could RTT environmental Services borrow to finance a site reclamation project if it expects revenues of $280,000 per year over a 5-year cleanup period? Expenses associated with the project are expected to be $90,000 per year. Assume the interest rate is 10% per year.

2.32 Income from cardboard recycling at Fort Bliss has been increasing at a constant rate of $1000 in each of the last three years. If this year's income (i.e., end of year 1) is expected to be $4000 and the increased income trend continues through year 5, (a) what will the income be three years from now (i.e., end of year 3) and (b) what is the present worth of the income over that 5-year period at an interest rate of 10% per year?

2.52 An investment of $600,000 increased to $1,000,000 over a 5-year period. What was the rate of return on the investment?

#### Solution Preview

Please refer attached file for better clarity of formulas in MS Excel.

Solution:

1.16 At an interest rate of 8% per year, $10,000 today is equivalent to how much

(a) 1 year from now and (b) 1 year ago?

a)Present Value=PV=-10000 (-ve sign indicates cash outflow)

Rate=8%

Periodic Payment=PMT=0

No. of Periods=Nper= 1

Future Value=FV=?

Use FV function in MS Excel to get the value

FV= $10,800.00

Alternate Method: Use of formula

FV=PV*(1+rate)^periods

FV= 10800

b) Present Value=PV=?

Rate=8%

Periodic Payment=PMT=0

No. of Periods=Nper= 1

Future Value=FV=10000

Use PV function in MS Excel to get the value

PV= $9,259.26

Alternate Method: Use of formula

PV=FV/(1+rate)^periods

PV=9259.259259 dollars

1.20 Certain certificates of deposits accumulate interest at 10% per year simple interest.

if a company invests $240,000 now in these certificates for the purchase of a new machine

3 years from now, how much will the company have at the end of the 3 year period?

Solution:

Present Value=PV=-240000 (-ve sign indicates cash outflow)

Rate=10%

Periodic Payment=PMT=0

No. of Periods=Nper= 3

Future Value=FV=?

Use FV function in MS Excel to get the value

FV= $319,440.00

(Assume annual compounding)

Alternate Method: Use of formula

FV=PV*(1+rate)^periods

FV= 319440 dollars

1.38 Identify the following as cash inflows or outflows to Daimler Chrysler: income taxes,

loan interest, salvage value, rebates to dealers, sales revenues, accounting services, cost

reductions

Income Taxes Cash outflow

Loan interest Cash outflow

Salvage Value Cash Inflow

Rebates to dealers Cash outflow

Sales Revenue Cash Inflow

Accounting Services Cash outflow

Cost Reductions Cash Inflow

1.41 Use the rule of ...

#### Solution Summary

There are 9 problems related to time value of money concepts. Solution to each problem describes the step by step method to find out the value of desired parameter.