Assignment 01 Selected Questions and Solutions 1.

. You are considering two investment opportunities: -investing $3,000 at an interest rate of 4.3% compounded annually for 9 years or -investing $3,000 at a simple interest rate of 5% per year for 9 years. Which option is better? 2. If you desire to withdraw the following amounts over the next 4 years from a savings account that earns a 5% interest compounded annually, how much do you need to deposit now? Cash flow: at n=1, $800; at n=2, $600; at n=4, $900. 3. You bought furniture ($3200) at your local furniture store and do not have to pay until two years from today (no interest, no payments). How much will you have to invest now in an account that earns 5.5% interest compounded annually in order to be able to repay the full amount two years from now? 4. You decide to invest $1,200 today. In two years, an additional $1,400 will be invested; in four years, $1,500; and $1,900 in six years. If the interest rate earned on your investment is 4.6 % compounded annually, what is the future worth of your four investments in 8 years? 5. What will be the amount accumulated with an initial deposit of $5,800 in 7 years if it is compounded at a rate of 6% per year? 6. You decide to invest $4,000 for 5 years. You can either invest the money at a simple annual interest rate of 5 percent or invest the money at an annual rate of 4 percent compounded semi-annually. Which option is better? 7. Your brother wants to borrow money from you and will repay you $5,000 in 4 years. If the interest rate is 4 percent compounded annually, what is the present worth (i.e. how much are you going to lend to your brother in order to get 5,000 in 4 years)? 8. If you lend $700 to a friend for six years at 6.8% interest compounded annually, how much will you receive at the end of six years? 9. If you lend $1200 to a friend for five years at 6% simple annual interest, how much will you receive at the end of five years? 10. You receive a loan of $6,800 today and must repay it in a lump sum in 4 years at a rate of 5.2 percent compounded annually. What is the future worth? 11. You borrow $8,000 to buy a used car. The interest rate is 7.5% compounded annually. If you are to repay the loan over a period of 5 years, what will be your annual (end of year) payments?

12. $2000 dollars is deposited at the end of each year into a savings account that pays 3% nominal interest, compounded annually. What will be the balance in the account at the end of 10 years? 13. The maintenance on a machine is expected to increase by $1000 per year for the following 9 years. If the maintenance cost is expected to be $2,000 at the end of the first year, how much should be set aside now to pay for the maintenance cost for the next 9 years? Assume an interest rate of 10% compounded annually. 14. You borrowed money to pay for a production machine and agreed to repay the loan over the next 10 years. The first payment is $40,000 and each subsequent payment is $2,500 less than the previous payment. If the interest rate is 10% compounded annually, how much did you borrow? 15. Your parents set aside $500 per year (starting on your first birthday) and increase this amount by 15% every year until you reach 18 years old. How much will there be in this savings account if your money earned 4% compounded annually? 16. Your parents set aside $500 per year (starting on your first birthday) and decrease this amount by 15% every year until you reach 18 years old. How much will there be in this savings account if your money earned 4% compounded annually? 17. A machine costing $200,000 to buy will require maintenance costs of $3,000 per year starting at the end of the second year and increasing by $400 every subsequent year. At 8% interest compounded annually, the net present cost of this project, if the machine is to be used for 10 years, is: 18. Which 7 equivalent end-of-year annual payments (A) are equivalent to the following cash flow: -$3,000 at t=3; $5,000 at t=5; $5,000 at t=6 and $5,000 at t=7. Assume a 6% interest rate compounded annually. 19. An investor is considering two investments: Investment A: $1,500 from t=1 to t=5. Investment B: $X at t=1, increasing by $100 every subsequent year for 9 years. For which value $X would this investor remain indifferent? (Assume an interest rate of 10%)