Reference no: EM131344261

The Time Value of Money 

Complete the following problems. You will likely use a spreadsheet for this assignment but you may choose to type up your answers in a Word document. In either case, be sure to show your work.

Problem 1: Compound Interest

To what amount will the following SAR investments accumulate?

A)
Investment	7,000
Years	8
Percent	9%
FV =
B)
Investment	11,000
Years	10
Percent	7%
FV =
C)
Investment	20,000
Years	6
Percent	8%
FV =
D)
Investment	750
Years	12
Percent	12%
FV =

Problem 2: Present Value

What is the present value of the following future amounts?

A)
FV	1,200
Years	7
Percent	11%
PV =
B)
FV	400
Years	6
Percent	6%
PV =
C)
FV	1,500
Years	8
Percent	4%
PV =
D)
FV	2,500
Years	8
Percent	20%
PV =

Problem 3: Future Value

Sales of a new finance book were 20,000 copies this year and were expected to increase by 15 percent per year. What are expected sales during each of the next 3 years?

DATA
Copies	20,000
Percent	15%
Years	3

Solution:-

FV for 1st yr =

FV for 2nd yr =

FV for 3rd yr =

Problem 4: Present-Value Comparison

Assuming you can earn 9 percent on your money, which of the following offers should you choose? SAR 1200 today; SAR 12,500 in 11 years; or SAR 30,000 in 25 years?

Solution:-

Percent	9%
	Years	Amount	PV
A	Today	1,200
B	12	12,500
C	25	30,000

Which offer should you choose and why?

Problem 5: Compound Annuity
What is the accumulated sum of each of the following streams of payments?

a. SAR 1,500 a year for 8 years compounded annually at 6 percent

b. SAR 1,000 a year for 6 years compounded annually at 12 percent

c. SAR 350 a year for 5 years compounded annually at 5 percent

d. SAR 125 a year for 4 years compounded annually at 4 percent

Solution:-

A)
Pymt	1,500
Years	8
Percent	6%
FV =
B)
Pymt	1,000
Years	6
Percent	12%
FV =
C)
Pymt	350
Years	5
Percent	5%
FV =
D)
Pymt	125
Years	4
Percent	4%
FV =

Problem 6: Compound Interest with Nonannual Periods
a. Calculate the future sum of SAR 7,000, given that the money will be held in the bank for 5 years at an annual interest rate of 6 percent.

b. Recalculate part a. assuming the interest rate is (1) an APR of 6 percent compounded semiannually and (2) an APR of 6 percent compounded bimonthly.

c. Recalculate parts a. and b. for an APR of 12 percent

d. Recalculate part a. using a time horizon of 12 years (the APR is still 6 percent).

e. With respect to the effect of changes in the stated interest rate and holding periods on future sums in parts c. and d., what conclusions do you draw when you compare these figures with the answers found in parts a. and b.?

Solution

A)
PV		7,500
Years		5
Percent		6%
FV =
B)
Semiannual	2
Bimonthly	6
C)
Rate		12%
Annual
Semiannual
Bimonthly
D)
Years		12
Annual