Mendez Co.

has identified an investment project with the following cash

flows. If the discount rate is 10 percent, what is the present value of
these cash flows? What is the present value at 18 percent? At 24
percent?

DISCOUNT RATE 10% 18% 24%

NUMBER 4

0 1 2 3 4
CASH FLOWS 470 610 735 920

PRESENT VALUE USING THE FORMULA

PRESENT VALUE 2136.79 1758.27 1550.39
Investment X offers to pay you $5,300 per year for eight years, whereas Investment
Y offers to pay you $7,300 per year for five years. Which of these cash flow streams
has the higher present value if the discount rate is 5 percent? If the discount rate is
15 percent?

INVESTMENT X
PMT 5300
YEAR 8
INVESTMENT Y
PMT 7300
YEAR 5
DISCOUNT RATE 5% 15%

0 1 2 3 4 5 6
5300 5300 5300 5300 5300 5300

0 1 2 3 4 5
7300 7300 7300 7300 7300

PRESENT VALUE USSING THE FORMULA

INVESTMENT X
PRESENT VALUE $34,255.03 $23,782.80
INVESTMENT Y
PRESENT VALUE $31,605.18 $24,470.73

PRESENT VALUE USSING THE FV FUNCTION

INVESTMENT X
PRESENT VALUE $34,255.03 $23,782.80
INVESTMENT Y
PRESENT VALUE $31,605.18 $24,470.73
 7 8
5300 5300
Christie, Inc., has identified an investment project with the following cash flows. If the
discount rate is 6 percent, what is the future value of these cash flows in Year 4? What is the
future value at a discount rate of 13 percent? At 27 percent?

DISCOUNT RATE 6% 13% 27%

YEAR 4

0 1 2 3 4
CASH FLOW 1075 1210 1340 1420

FETURE VALUE USSING THE FORMULA

PRESENT VALUE $ 4,340.91 $ 3,698.53 $ 2,769.68
FUTURE VALUE $ 10,960.60 $ 10,712.51 $ 14,480.59
An investment offers $3,850 per year for 15 years, with the first payment occurring one year from
now. If the required return is 6 percent, what is the value of the investment? What would the value
be if the payments occurred for 40 years? For 75 years? Forever?

PMT 3850
YEAR 15 40 75 Forever
DISCOUT RATE 6%

FUTURE VALUE USSING THE FORMULA

future value $89,612.48 $595,833.57 $5,008,652.42 $64,166.67

FUTURE VALUE USSING THE FV FUNCTION

FUTURE VALUE ($89,612.48) ($595,833.57) ($5,008,652.42) $64,166.67
If you put up $45,000 today in exchange for a 6.4 percent, 15-year annuity, what
will the annual cash flow be?

PRESENT VALUE 45000

DISCOUNT RATE 6.4%
YEAR 15

0 1 2 3 4 5 6
45000

USSING THE FORMULA

FUTURE VALUE $114,113.48
PMT $4,755.18

USSING THE FUNCTION

FUTURE VALUE $114,113.48
PMT $4,755.18
7 8 9 10 11 12 13 14 15
Your company will generate $55,000 in annual revenue each year for the next seven
years from a new information database. If the appropriate discount rate is 8.2 percent,
what is the present value of the savings?

PMT $55,000
YEAR 7
DISCOUT RATE 8.6%

0 1 2 3 4 5 6 7
CASH LOW 55,000 55,000 55,000 55,000 55,000 55,000 55,000

USSING THE FORMULA

PRESENT VALUE $280,567.11

USSING THE FUNCTION

PRESENT VALUE $280,567.11
Calculating Annuity Values [LO1] If you deposit $4,900 at the end of each of the next 20 years into
interest, how much money will you have in the account in 20 years? How much will you have if yo
PMT $4,900
YEAR 20
DISCOUT RATE 10.3%

0 1 2 3 4 5
CASH LOW 4,900 4,900 4,900 4,900 4,900

USSING THE FORMULA

ANNUITY FUTURE VALUE $ 290,390.14

USSING THE FUNCTION

ANNUITY FUTURE VALUE $290,390.14
h of the next 20 years into an account paying 10.3 percent
w much will you have if you make deposits for 40 years?

6 7 ... 20
4,900 4,900 4,900
Calculating Annuity Values [LO1] You want to have $75,000 in your savings account 12 years from
prepared to make equal annual deposits into the account at the end of each year. If the account p
interest, what amount must you deposit each year?
FUTURE $75,000
YEAR 12
DISCOUT RATE 6.4%

0 1 2 3 4 5 6
CASH LOW

USSING THE FORMULA

ANNUITY PRESENT VALUE $ 615,225.59

USSING THE FUNCTION

ANNUITY PRESENT VALUE $615,225.59
count 12 years from now, and you’re
ear. If the account pays 6.4 percent

7 ... 12
Calculating Annuity Values [LO2] Pursell Bank offers you a five-year loan for $100,000
annual interest rate of 6.8 percent. What will your annual loan payment be?
USSING THE FORMULA
annual loan payment $24,258.61

ussing the function

annual loan payment $24,258.61
ear loan for $100,000 at an
ayment be?
Calculating Perpetuity Values [LO1] The Maybe Pay Life Insurance Co. is trying to
sell you an investment policy that will pay you and your heirs $30,000 per year forever. If
the required return on this investment is 5.6 percent, how much will you pay for the policy?
USSING THE FORMULA
Perpetuity Values $535,714.29
g to
ar forever. If
for the policy?
Calculating Perpetuity Values [LO1] In the previous problem, suppose a sales associat
$525,000. At what interest rate would this be a fair deal?
PMT $ 30,000
Perpetuity Values $ 525,000
USSING THE FORMULA
RATE% 17.5
se a sales associate told you the policy costs
12. Find the EAR in each of the following cases:

Stated Rate (APR) Number of Times Compounded Effective Rate (EAR)

7.80% Quarterly 0.0800455760000001
15.30% Monthly 0.164198464831542
12.40% Daily 0.131992032983159
11.40% Infinite 0.118386872
13. Find the APR, or stated rate, in each of the following cases:

Stated Rate (APR) Number of Times Compounded Effective Rate (EAR)

0.132805265975782 Semiannually 14.20%
0.170092745818585 Monthly 18.40%
0.105367118877998 Weekly 11.10%
0.0864829434305323 Infinite 8.90%
14. First National Bank charges 13.8 percent compounded monthly on its business loans. First United Bank charges 14.1 perce
compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

Percent Compounded 13.80%

Number Of Times Compounded 12

EAR (First National)

EAR using the Formula 14.71%
EAR using the EFFECT Function 14.71%

I would prefer to take a loan from First United, since its effective annual rate is lower.
nited Bank charges 14.1 percent
n?
15. Evergreen Credit Corp. wants to earn an effective annual return on its consumer loans of 18.2 percent per year. The bank u
What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an unin

Effective Annual Return = 18.2%

Since daily compounding on its loans is used, it has been stated to use 365 days a year.

Effective Rate (EAR) 18.20%

Number Of Times Compounded 365

Annual Perccentage Rate (APR)

APR using the NOMINAL Function 16.72%

An interest rate of 16.72% is required to be reported by the bank as per law to the potential customers.
 percent per year. The bank uses daily compounding on its loans.
rate is misleading to an uninformed borrower.

tomers.
What is the future value of $5,500 in 17 years at an APR of 8.4 percent compounded semiannually?

Present Value (PV) $5.50

Number Of Year 17
Annual Perccentage Rate (APR) 8.40%
Number Of Times Compounded 2

Computation Of Future Value $22.23

y?
Spartan Credit Bank is offering 8.3 percent compounded daily on its savings accounts. If
you deposit $7,500 today, how much will you have in the account in 5 years? In 10 years?
In 20 years?

YEAR 5 10 20
DISCOUT RATE 8.30%
PRESENT VALUE $7,500

FUTURE VALUE USSING THE FORMULA

FUTURE VALUE $11,173.87 $16,647.38 $36,951.36

FUTURE VALUE USSING THE FV FUNCTION

FUTURE VALUE $11,173.87 $16,647.38 $36,951.36
An investment will pay you $95,000 in 10 years. If the appropriate discount
rate is 9 percent compounded daily, what is the present value?

FUTURE VALUE $95,000

DISCOUNT RATE 9.0%
YEAR 10

0 1 2 3 4 5 6 7
95000

USSING THE FORMULA

PRESENT VALUE $40,129.03

USSING THE FUNCTION

PRESENT VALUE $40,129.03
8 9 10
Big Dom’s Pawn Shop charges an interest rate of 25.5 percent per month
on loans to its customers. Like all lenders, Big Dom must report an APR
to consumers. What rate should the shop report? What is the effective
annual rate?

DISCOUNT RATE 25.50% 306%

12

The APR is simply the interest rate per period times the number of periods in a year. In this case, the
year, so we get:

USSING THE FORMULA

APR = 12*(25.5%) = 306%

To find the EAR, we use the EAR fomula:

EAR = (1 + APR/m)m - 1 = (1 + 306%/12)12 - 1 = 1.426,92%

USSING THE FUNCTION

EAR 14.265980728652

APR 3.06
n a year. In this case, the interest rate is 25.5 percent per month, and there are 12 months in a
You want to buy a new sports coupe for $84,500, and the finance office at the dealership
has quoted you an APR of 4.7 percent for a 60-month loan to buy the car. What will your
monthly payments be? What is the effective annual rate on this loan?

INTEREST RATE 4.7%

MONTH 60
$84,000

Monthly payments $ 1,583.03

REAL RATE 4.8%
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment
schedule of $500 per month. You will charge 1.8 percent per month interest on the overdue balance. If the current
balance is $18,000, how long will it take for the account to be paid off?

Discount Rate 1.8%

Current Monthly Payment $ 500
Loan Balance $ 18,000

Number of period 58.527404434996

 to a repayment
alance. If the current
Calculating EAR [LO4] Friendly’s Quick Loans, Inc., offers you “three for four or I knock on your door.” This means you get $
and repay $4 when you get your paycheck in one week (or else). What’s the effective annual return Friendly’s earns on this
business? If you were brave enough to ask, what APR would Friendly’s say you were paying?

Principal amount $ 3
Repayment amount $ 4
The number of days 365
The number of compounding periods per year 52

Annual Perccentage Rate (APR) for formula 1738.1%

Effective Annual Rate (EAR) for formula 325326441.9%

Annual Perccentage Rate (APR) for function 1747.9%

Effective Annual Rate (EAR) for function 325326441.9%
ur or I knock on your door.” This means you get $3 today
e effective annual return Friendly’s earns on this lending
would Friendly’s say you were paying?
Monthly Payment $ 260,000
Innitial Investment $ 1,500
Monthly Return 0.0057692308
Monthly Return 0.6%
Monthly 12

Annual Percentage Rate (APR) for formulas 0.0692307692

Annual Percentage Rate (APR) for functions 0.0057540316
You are planning to make monthly deposits of $475 into a retirement account that
pays 10 percent interest compounded monthly. If your first deposit will be made one
month from now, how large will your retirement account be in 40 years?

DISCOUNT RATE 10%

PMT $475
YEAR 40 MONTH 39*12+11=479

0 1 2 3 4 5 6 7
475

FVA $3,035,641
8 9 10 11 12 13 14 ... 40
discount rate 10%
pmt $5,700
year 40

0 1 2 3 4 5 6 7
$5,700

FVA $2,345,252
8 9 10 11 12 13 ... 40
Beginning three months from now, you want to be able to withdraw $3,000 each quarter from
your bank account to cover college expenses over the next four years. If the account pays .57
percent interest per quarter, how much do you need to have in your bank account today to meet
your expense needs over the next four years?

YEAR 4 QUARTER 16
DISCOUNT RATE 0.57%
PMT $3,000

0 3 6 9 12 15 18 21
$3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000

USSING THE FORMULA

PRESENT VALUE $ 45,751.83

USSING THE FUNCTION

PRESENT VALUE $45,751.83
 24 27 30 33 36 39 42 45 48
$3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000
year cash flow
1 $815
2 $990
3 $0
4 $1,520

0 1 2 3 4
CASH FLOW 815 990 0 1520

PRESENT VALUE OF THE CASH FLOW 0.087431

 Year Cash Flow
1 $2,480
2 $0
3 $3,920
4 $2,170

0 1 2 3 4
CASH FLOWS $2,480 $0 $3,920 $2,170

THE PRESENT VALUE OF THE CASH FLOW $6,788