FIN254: Assignment#4 (Based on Chapter 6)

1. The present value of the following cash flow stream is $6000 when discounted at 11% annually. What is the value of the missing cash flow? Years Cash flow 1 1500 ? ! 1"00 # #00 . $uppose %r. &a'u wants to (e a millionaire in !0 years. )ow much does he have to save each month if he can earn 1 % annual return? )ow much does he have to save each month if he starts saving ten years from now? Twenty years from now? !. $uppose* %ercantile (an+ is offering you to ,uadruple your money in twenty months. What rate of return are you (eing offered per ,uarter? #. -ou always purchase lottery tic+ets thin+ing ./012 342554 /4-6. 7inally one day* you won a lottery. -ou will receive payments for !0 years* which will increase 5% per year. -ou will receive $500*000 at the end of first year. 2f the re,uired rate is 10%* what is the present value of your winnings? 5. 0ne day you wo+e up from sleep and thought 8)mm* 2 wish 2 could have $!0*000 with me* 2 could (uy my dream car9: Then you thought you could ma+e monthly payments of $!00 starting from the end of this month into an account that pays 1 % interest compounded monthly to have that amount in your account. Then you found out the num(er of payments would (e ;;;;;;;;;? 6. 4 0;year annuity pays $ 000 per month and payments are made at the end of each month. 2f the interest rate is 1 % compounded monthly for the first 10 years and 10% compounded monthly thereafter. What is the present value of the annuity? <. 5iven an interest rate of <% per year* what is the value at date t=5 of a perpetual stream of $6000 payments that (egins at date t=10? ". )ello dear* 2 +now the university is emptying your poc+et. 2 can give you a 10% interest rate on a 1;year loan. That means* if you (orrow $!0*000 from me the interest for the year will (e $!000. $ince you must repay $!!*000 at the end of the year anyway* why don6t you pay me !!*000>1 = *<50 per month. That way* we can +now each other (etter and financially (oth payments mean the same. 1o they? What does the ?4& tell you? $hould you accept the offer? Why or why not? @. Arepare an amortiBation schedule for a five year loan of $60*000. The interest rate is 1 % per year and the loan calls for e,ual monthly payments. $how me the amortiBation schedule for the first five months only. )ow much interest is paid in the fifth month? )ow much total interest is paid over the life of the loan Cdisregarding TD%E?

10. 4(dul wishes to choose the (etter of two e,ually lengthy cash flow streamsF annuity G and annuity -. G is an annuity due and with a cash inflow of $@000 for each of < years. - is an ordinary annuity with a cash inflow of $10000 for each of < years. 4ssume that 4(dul can earn 1!% on his investments. a. 0n a purely su('ective (asis* which annuity do you thin+ is more attractive? (. 7ind the present value for (oth annuity G and annuity -? c. Hse your findings in part ( to indicate which annuity is more attractive. Why? Iompare your findings to your su('ective response in part a. 11. 7ind out the ?4& in each of the casesF Number of times APR(%) EAR compounded " Juarterly 0 %onthly 1 1aily 15 2nfinite 1 . 7ind the stated rate in the following casesF Number of times EAR(%) APR compounded 1#.5 $emiannually 1 .<5 %onthly 10.6 Wee+ly 5 2nfinite 1!. Kan+ 4 is offering you a savings plan where you need to invest $1*500 at the (eginning of every month for 10 years at an interest rate of 1 % compounded monthly. Kan+ K offers 11.50% continuous compounding interest. )ow much money Cone lump sum amountE would you need to deposit today in Kan+ K for 10 years for it to (e worth the same as the savings plan offered (y Kan+ 4? 1#. -ou have 'ust arranged for a $<50*000 mortgage to finance the purchase a piece of land. The loan calls for e,ual monthly payments with ".1% 4A&* and it calls for monthly payments over the neLt !0 years. 2f the loan has an eight;year (alloon payment Mmeaning you plan to pay off that loan thenN* what will that amount (e? 15. -ou have #0 years left until retirement and want to withdraw $ 5*000 at the end of every month after retirement for 5 years. -our salary is paid annually* and you will receive $50*000 at the end of current year. -our salary will increase 5% per year* and you can earn 1 % 4A& with monthly compounding on your money. 2f you save a constant percentage of your salary every year* what percentage of your salary must you save each year? 16. -our friend is cele(rating her !5th (irthday today and wants to start saving for her anticipated retirement at age 65. $he wants to (e a(le to withdraw $ 50*000 from her savings account on each (irthday for 0 years following her retirementO the first withdrawal will (e on her 66th (irthday. -our friend intends to invest her money in the local credit union* which offers 10 percent interest per year with monthly compounding.

a. 2f she starts ma+ing e,ual monthly payments 'ust one month after the !5th (irthday and continue to ma+e deposits until she is 65 Cthe last deposit will (e on her 65th (irthdayE* what amount must she deposit every month to (e a(le to ma+e the desired withdrawals after retirement? (. $uppose your friend has 'ust inherited a large sum of money. &ather than ma+ing e,ual monthly payments* she has decided to ma+e one lump sum payment on her !5th (irthday to cover her retirement needs. What amount does she have to deposit today? c. $uppose your friend6s employer will contri(ute $ *500 to the account every year as part of the company6s profit;sharing plan. 2n addition* your friend eLpects a $150*000 distri(ution from a family trust fund on her 50th (irthday* which she will also put into the retirement account. What amount must she deposit monthly now to (e a(le to ma+e the desired withdrawals at retirement? Try Problem 57 from page 186 of your text book! [Just for FUN, you o!"t !ee to subm#t t$#s %#t$ your ass#g!me!t problems&'

Due Date: 24th November, 2013 (Sunday)

( #t#o!al )!stru*t#o!s+ 1. Alease do not copy some(ody else6s assignment or provide your solution to some(ody else. 2f you are caught* you will get a Bero. . -ou may su(mit your assignment in either hand;written or computer composed format. 2n case of computer composed format* you need to email me the soft copy Cwith appropriate su('ect mentioning the assignment num(er* your name* id* course* section* etc.E in addition to the hardcopy su(mission. !. 4;# siBe paper is preferred for the assignment. 4 cover page is a must. -ou may use the sample cover page that 2 have made availa(le along with the assignment file. #. -ou must complete the assignment (efore coming to the class on the due date. 2f anyone is seen doing the assignment in the class* s>he will get a Bero. 5. -our assignment must loo+ professional. 0therwise you may lose mar+s. )owever* this does not mean you have to do spiral or other types of (inding* or use color printing. /ust staple your papers and su(mit. 6. -ou may lose mar+s if you fail to follow the instructions properly.
<. 3ate assignments would (e accepted with 0% penalty if su(mitted (y the neLt class* 50% penalty if su(mitted later (ut within a wee+ from the assigned date. No assignment would be accepted after a week from the submission due date.