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Time value of money

Finance Ch5 Q's

Answer these questions using Excel functions where applicable.
Show formulas and how the answer was obtained.
On the first question the instructor wants us to use our present age to nearest month. I am 22 years and 2 months.

1. Assume you drink one coffee per day, 5 days a week. Assume coffee is $4.00. That makes it $20 per week and $80 per month. Assume you can invest $80 per month in the stock market and assume you can earn 1% per month on your stock investment.

a. At your retirement, when you are 65 years old, how much will be the total amount of money if you switch from coffee drinking to investing in the stock market?

b. Assume that when you get to 65, you switch your funds from stock market investment to bond market investment. Assume you can earn 7% on your bond investment. You decide to withdraw a constant amount each year for the next 20 years when get to retirement age. How much will be your annual withdrawal from age 66 to 85 (nothing left at 85) if you switch your coffee drinking to stock and bond investments?

2. You want to buy a new car for $48,000. The contract is in the form of 60 month annuity due at 7.45% APR. What will be your monthly payment?

3. You borrow $10,000 from your bank that charges you 15% per year compounded monthly for the first 6 months, increasing thereafter to 18% compounded monthly. How much interest do you owe at the end of the first year?

4. How long does it take for a sum of $89,000 to grow to $175,000 if 1) simple interest of 5% and 2) interest rate is 5% compounded monthly?

5. You have an investment that will pay you 1.05% per month. How much will you have per dollar invested in one year? In two years?

6. To finance the purchase of a warehouse, you have arranged for a 30-year mortgage loan for 80% of $2,500,000 purchase price. The monthly payment on the loan will be $13,400. What is the APR on this loan? The EAR?

7. You want to buy a sports car for $61,000. The contract is in the form of a 60-month annuity due at an 8.15% APR. What will be your monthly payment?

8. Mary is going to receive a 30-year annuity of $8,000. Nancy is going to receive perpetuity of $8,000. If the appropriate interest rate is 9%, how much more is Nancy's cash flow worth?

Solution Preview

Please see the attached file

On the first question the instructor wants us to use our present age to nearest month. I am 22
years and 2 months.
1 Assume you drink one coffee per day, 5 days a week. Assume coffee is $4.00. That
makes it $20 per week and $80 per month. Assume you can invest $80 per month in the
stock market and assume you can earn 1% per month on your stock investment.

a. At your retirement, when you are 65 years old, how much will be the total amount of
money if you switch from coffee drinking to investing in the stock market?

We have to find the future value of the savings which is in the form of annuity. The time
period is 514 months (65-22 years = 516 months - 2 months beyond 22 = 514 months
We use the FV function to calculate the future value
Monthly Savings 80
Period 514 months
Interest Rate 1% per month
Future Value $1,323,300.55

b. Assume that when you get to 65, you switch your funds from stock market
investment to bond market investment. Assume you can earn 7% on your bond
investment. You decide to withdraw a constant amount each year for the next 20 years
when get to retirement age. How much will be your annual withdrawal from age 66 to ...

Solution Summary

The solution explains various questions relating to time value of money

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