Question

Comprehensive in class Time Value of Money problems 100520

1. You are a retailer planning a sale on a security system that requires no payments for two years. At the end of two years, buyers must pay the full amount. The system;s suggested retail price is $4,100, but you are willing to sell it today for $3,000 cash. What is your sale price if payment will not occur for two years and the market interest rate is 10%?

2. Assume that you win at $150,000 cash sweepstake today. You decide to deposit this cash in an account earning 8% annual interest, and you plan to quit your job when the account equals $555,000. How many years will it be before you can quit working?

3. A company invests $45,000 per year for five years at 12% annual interest. Compute the value of this ordinary annuity investment at the end of five years.

Answer 1

Answer

1. $3630

2. 17 years

3. $285878.13

i= 10% Sale Price today = $3000 Sale Price after 2 years = 3000 Clti) = 3000 (1:1)² $3630 t = numbea of years iz rate of interest A counmulte Value - Present ValuxClt ist t 55500o = 1500 x1 +0.08) ( 0.08) t = 3.7 Toking log both sides t bg (108) = lg 3.7 t hog33 log (1.08) t = 17 years Future value of ordinary annuity = 4500x 557 @ 12% = 45000 (1.125-1) = $ 285,878.13