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# Concepts in Time Value of Money

Please refer to the attachment/s for missing diagrams.
Answers are provided for the problems listed below. You may not find the solutions of all problems listed in the attachment/s.

1. Tom borrows \$ 6000 for 5 five at 8% interest compounded annually. He repays the loan in a single payment at the end of the 5 year period. How much is his payment?
\$7680
\$8400
\$8820
\$9140

2. Tom borrows \$ 6000 for 5 years at 8 % per year simple interest. He repays the loan with a single payment at the end of the 5 years. The value of the payment is most nearly
\$8250
\$8400
\$8820
\$9250

3. The interest rate is 10 % compounded annually. Ten thousand dollars 3 years from today is equivalent to a value today that is most nearly
\$7513
\$8140
\$8477
\$13310

4. Gloria borrows \$ 3,000 for three years at 6 % simple interest per year. She pays the principle and interest in a single payment at the end of three years. The amount of interest (\$) Gloria pays is most nearly
\$500
\$540
\$565
\$590

5. Gloria borrows \$ 3,000 for three years at 6 % interest per year, compounded annually. She pays the principle and interest in a single payment at the end of three years. The amount of interest (\$) Gloria pays is most nearly
\$565
\$575
\$585
\$595

6. Harry borrows \$ 10,000 for ten years at 12 % interest. He pays the principle and interest at the end of the ten years. His total payment (\$) at the end of ten years is most nearly
\$29,000
\$31,000
\$32,000
\$33,000

7. Harry borrows \$ 10,000 for ten years at 12 % interest, compounded every six months. He pays the principle and interest at the end of the ten years. His total payment (\$) at the end of ten years is most nearly

\$29,000
\$31,000
\$32,000
\$33,000

8. Harry borrows \$ 10,000 for ten years at 12 % interest, compounded every three months (quarterly). He pays the principle and interest at the end of the ten years. His total payment (\$) at the end of ten years is most nearly
\$29,000
\$31,000
\$32,000
\$33,000

9.
The value of (F/P, 6%, 6) is most nearly
0.6663
0.7050
1.419
1.501

10.
The value of (P/F, 4%, 9) is most nearly
0.6756
0.7026
0.7084
0.7307

11.
The value of (F/P,11%,10) is most nearly
0.3310
0.3574
2.845
2.940

12. The interest rate is 7%.
\$ 4,000

P
The value of P (\$) is most nearly
\$2,850
\$3,050
\$3,550
\$ 4,110

13. Interest rate = 9 %.
\$ 2,000

Q
The value of Q (\$) is most nearly
\$ 1,500
\$ 2,145
\$ 2,825
\$ 2,930

14. The interest rate is 10 %. I deposit \$ 100 today. One year from today I deposit \$ 200. How much will I have (\$) four years from today?
\$ 413
\$ 419
\$ 425
\$ 439

15. At the end of two years, what will be the balance in the local bank?
\$ 3,150
\$ 3.300
\$ 3,306
\$ 3,312

16. At the end of two years, what will be the balance in the out of town bank?
\$3,150.
\$3,300
\$3,306.
\$3,312

17. How much additional interest will be earned by using the out of town bank?
\$ 3
\$ 5
\$ 6
\$12

18. How much is the lump sum payment that Marty owes under the original contract?
\$371.
\$385.
\$394.
\$423.

19. How much is the alternate payment proposed?
\$371.
\$385.
\$394.
\$423.

20. Which alternative should be selected?
Original Contract
Alternate Payment

21. Consider the following Cash Flow Table
Year Cash Flow
0 -1,000
1 0
2 0
3 - W
4 0
5 0
6 + \$ 4,000
Interest rate is 8%. The value (\$) of W is most nearly
\$ 1,522
\$ 1,780
\$ 1,915
\$ 2,110

22. P = \$ 4,000 i = 10 % n = 5 .The value of F (\$) is most nearly
\$ 5,450.
\$ 5,900
\$ 6,250
\$ 6,450.

23. P = \$ 2,000 F = \$ 2,800 n = 6 i (%) is most nearly
5.22%
5.76%
5.89%
6.24%

#### Solution Preview

1
PV=\$6000, i=8%, n=5
FV=PV*(1+i)^n=6000*(1+8%)^5=\$8816
Correct option is C. \$8820

2
Simple interest=PV*i*n=6000*8%*5=\$2400
Total payment at the end of 5 years=6000+2400=\$8400
Option B i.e. \$8400 is correct

3.
FV=\$10000, i=10%, n=3
PV=FV/(1+i)^3=10000/(1+10%)^3=\$7513
Option A i.e. \$7513 is correct

4.
PV=\$3000, i=6%, n=3
S.I.=PV*i*n=3000*6%*3=\$540
Option B i.e. \$540 is correct

5.
PV=\$3000, i=6%, n=3
FV=PV*(1+i)^n=3000*(1+6%)^3=\$3573
Interest=FV-PV=3573-3000=\$573
Option B i.e. \$575 is ...

#### Solution Summary

There are 23 basic problems in finance. Solution to each problem depicts the methodology to find out the value of desired parameter.

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