FV=C0(1+r)

NPV=Cost+PV

FV=C0(1+r)T
EAR=

FV=C0erT

BradleySnapphasdeposited$7,000inaguaranteedinvestmentaccountwithapromisedrateof6%
compoundedannually.Heplanstoleaveittherefor4fullyearswhenhewillmakeadownpayment
onacaraftergraduation.Howmuchofadownpaymentwillhebeabletomake?

Findthepresentvalueof$5,325tobereceivedinoneperiodiftherateis6.5%.

Yourparentsaregivingyou$100amonthforfouryearswhileyouareincollege.Ata6%discountrate,
whatarethesepaymentsworthtoyouwhenyoufirststartcollege?

TheAjaxCo.justdecidedtosave$1,500amonthforthenextfiveyearsasasafetynetforrecessionary
periods.Themoneywillbesetasideinaseparatesavingsaccountwhichpays3.25%interestcompounded
monthly.Itdepositsthefirst$1,500today.Ifthecompanyhadwantedtodepositanequivalentlumpsum
today,howmuchwouldithavehadtodeposit?

Whatisthefuturevalueof$2,400ayearforthreeyearsatan8%rateof
interest?

Toniadds$3,000tohersavingsonthefirstdayofeachyear.Timadds$3,000to
hissavingsonthelastdayofeachyear.Theybothearna9%rateofreturn.What
isthedifferenceintheirsavingsaccountbalancesattheendofthirtyyears?

Youestimatethatyouwillhave$24,500instudentloansbythetimeyou
graduate.Theinterestrateis6.5%.Ifyouwanttohavethisdebtpaidinfull
withinfiveyears,howmuchmustyoupayeachmonth?

Yourcardealeriswillingtoleaseyouanewcarfor$299amonthfor60
months.Paymentsaredueonthefirstdayofeachmonthstartingwiththeday
yousigntheleasecontract.Ifyourcostofmoneyis4.9%,whatisthecurrent
valueofthelease?

TodayisJanuary1.Startingtoday,Samisgoingtocontribute$140onthe
firstofeachmonthtohisretirementaccount.Hisemployercontributesan
additional50%oftheamountcontributedbySam.IfbothSamandhisemployer
continuetodothisandSamcanearnamonthlyrateofof1percent,how
muchwillhehaveinhisretirementaccount35yearsfromnow?

.
WinstonEnterpriseswouldliketobuysomeadditionallandandbuilda
newfactory.Theanticipatedtotalcostis$136million.Theownerofthefirmis
quiteconservativeandwillonlydothiswhenthecompanyhassufficientfunds
topaycashfortheentireexpansionproject.Managementhasdecidedtosave
$450,000amonthforthispurpose.Thefirmearns6%compoundedmonthlyon
thefundsitsaves.Howlongdoesthecompanyhavetowaitbeforeexpandingits
operations?

Yourinsuranceagentistryingtosellyouanannuitythatcosts$100,000today.
Bybuyingthisannuity,youragentpromisesthatyouwillreceivepaymentsof
$384.40amonthforthenext40years.Whatistherateofreturnonthis
investment?

Youhavesomepropertyforsaleandhavereceivedtwooffers.Thefirstofferis
for$189,000todayincash.Thesecondofferisthepaymentof$100,000today
andanadditional$100,000twoyearsfromtoday.Iftheapplicablediscountrate
is8.75%,whichoffershouldyouacceptandwhy?

Youjustpaid$350,000forapolicythatwillpayyouandyourheirs$12,000a
yearforever.Whatrateofreturnareyouearningonthispolicy?

Youarepayinganeffectiveannualrateof13.8%onyourcreditcard.Theinterest
iscompoundedmonthly.Whatistheannualpercentagerateonyouraccount?

10

Whatistheeffectiveannualrateifabankchargesyou7.64%compounded
quarterly?

TheSmartBankwantstoappearcompetitivebasedonquotedloanratesand
thusmustoffera7.9annualpercentagerate.Whatisthemaximumratethe
bankcanactuallyearnbasedonthequotedrate?

Youwanttohave$10,000savedtenyearsfromnow.Howmuchlessdoyouhave
todeposittodaytoreachthisgoalifyoucanearn6%ratherthan5%onyour
savings?
11