Time Value of Money Essay
Time Value of Money
1) A store offers two payment plans. Under the installment plan, you pay 20% down and 20% of the purchase price in each of the next 4 years. If you pay the entire bill immediately, you can take a 5% discount from the purchase price. a. Calculate the present value of the payments, if you can borrow or lend funds at a 7% interest rate. Assume the product sells for $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ 
b. Calculate the payment net of discount.
Payment net of discount $ 
c. Which is a better deal?
 
  Pay the entire bill immediately
 Installment plan

2) Home loans typically involve “points,” which are fees charged by the lender. Each point charged means that the borrower must pay 1% of the loan amount as a fee. For example, if the loan is for $170,000 and 4 points are charged, the loan repayment schedule is calculated on a $170,000 loan but the net amount the borrower receives is only $163,200. What is the effective annual interest rate charged on such a loan assuming loan repayment occurs over 156 months? Assume the interest rate is .75% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Effective annual interest rate % 
3) Suppose you take out a $1,000, 4year loan using addon interest with a quoted interest rate of 23.25% per year.
a. What will your monthly payments be? (Total payments are $1,000 + $1,000 × .2325 × 4 = $1,930.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Monthly payments $ 
b. What are the true APR and effective annual rate on this loan? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

APR % 
Effective annual rate % 


4) In a discount interest loan, you pay the interest payment up front. For example, if a 1year loan is stated as $28,000 and the interest rate is 22.25%, the borrower “pays” 0.2225 × $28,000 = $6,230 immediately, thereby receiving net funds of $21,770 and repaying $28,000 in a year. What is the effective annual rate on a 1year loan with an interest rate quoted on a discount basis of 22.25%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Effective annual rate % 
5)
You believe you will need to have saved $520,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Annual savings $ 
6)
Your consulting firm will produce cash flows of $110,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 6.2%, and you anticipate inflation of about 2.2%.
a. What is the present value of your firm’s cash flows for years 1 through 6? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Present value $ 
b. How would your answer to (a) change if you anticipated no growth in cash flow? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Present value $ 
7)
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Top of Form
Good news: You will almost certainly be a millionaire by the time you retire in 40 years. Bad news: The inflation rate over your lifetime will average about 2.6%.
a. What will be the real value of $1 million by the time you retire in terms of today’s dollars? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
Real value $ 
b. What real annuity (in today’s dollars) will $1 million support if the real interest rate at retirement is 2.4% and the annuity must last for 10 years? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
Real annuity $ 
Bottom of Form
8)
You believe you will spend $40,000 a year for 20 years once you retire in 40 years. If the interest rate is 6% per year, how much must you save each year until retirement to meet your retirement goal? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Annual savings $ 
A+

Subject: Annual percentage rate, Debt, Inflation,

University/College: University of California

Type of paper: Thesis/Dissertation Chapter

Date: 23 March 2016

Words:

Pages:
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