15.

You are offered $1,000 after five years (Offer 1) or $150 a year for five years (Offer 2). If you can earn 6 percent on your funds, calculate the future values of both payments. Use Appendix C to answer the question. Round your answers to the nearest dollar. FV_{(Offer 1)}: $ FV_{(Offer 2)}: $

Which offer will you accept? -Select-Offer 1Offer 2Item 3

If you can earn 16 percent on your funds, calculate the future values of both payments. Use Appendix C to answer the question. Round your answers to the nearest dollar. FV_{(Offer 1)}: $ FV_{(Offer 2)}: $

Which offer will you accept, if you can earn 16 percent on your funds? -Select-Offer 1Offer 2Item 6

Why are your answers different?

The choices are different as the higher interest rate -Select-favors early paymentsfavors late paymentsItem .

16.

This extended problem covers many of the features of a mortgage. You purchase a town house for $300,000. Since you are able to make a down payment of 20 percent ($60,000), you are able to obtain a $240,000 mortgage loan for 15 years at a 6 percent annual rate of interest. Use Appendix D to answer the questions. Round your answers to the nearest dollar.

What are the annual payments that cover the interest and principal repayment? $

How much of the first payment goes to cover the interest? $

How much of the loan is paid off during the first year? $

What is the interest payment during the second year? $

What is the remaining balance after the second year? $

Why did the interest payment change during the second year? The annual -Select-increasedecreaseItem in the amount owed -Select-increasesdecreasesItem each subsequent interest payment.

17.

You have an IRA worth $150,000 and want to start to make equal, annual withdrawals (i.e., distributions from the account) for 25 years. You anticipate earning 6 percent on the funds. (To facilitate the calculation, assume an ordinary annuity.) Use Appendix D to answer the questions. Round your answers to the nearest dollar.

How much can you withdraw each year? $

Since you are earning 6 percent on your investments, how much of the withdrawal consumes your investments? $

How much will be in the account at the end of the first year? $

How much do you earn on your investments in the account during the second year? $

How much will be in the account at the end of the second year? $

18.

eBook

Problem 7-18

You have graduated from college but unfortunately have $31,000 in outstanding loans. The loans require payments of $3,200 per year, which covers interest and principal repayment (that is, the loan has the same basic features as a mortgage). If the interest rate is 3 percent, how long will it take you to repay the debt? Use Appendix D to answer the question. Round your answer up to the next whole number.

If the powers that be raise the rate to 6 percent, how many additional years will be required to retire the loans? Use Appendix D to answer the question. Round your answer up to the next whole number.

19. A corporation issues a debt instrument such as a bond that promises to pay you annually $70 for four years and $1,000 after four years. What is the maximum amount you would pay for this debt instrument if you wanted to earn 9 percent? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $

20. You are offered an annuity that will pay $10,000 a year for ten years (that is, ten payments), but the payments start after five years have elapsed. If you want to earn 9 percent on your funds, what is the maximum you should pay for this annuity? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $

21.

Auntie Kitty sells her home for $150,000, which is then invested to earn 6 percent annually. If her life expectancy is five years, what is the maximum amount she can annually spend on a nursing home, doctors, and taxes? Use Appendix D to answer the question. Round your answer to the nearest dollar. The maximum amount that can be annually spend is $ .

If the return were to double to 12 percent, will the amount she may spend each year more than double? Use Appendix D to answer the question. Round your answer to the nearest dollar. If the return were to double, the amount that can be annually spend will -Select-more than doubleless than doubledoubleItem 2 and will be equal to $ .

22. You buy a mutual fund for $1,000. It annually distributes $40 for ten years, after which you sell the shares for $950. What is the annualized return on your investment? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest whole number. %

23.

You win a judgment in an auto accident case for $82,500. You immediately receive $30,000 but must pay your lawyer's fee of $20,000. In addition, you will receive $2,500 a year for 15 years for a total of $37,500, after which the balance owed ($15,000) will be paid. If the interest rate is 7 percent, what is the current value of your settlement? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $

24.

A firm must choose between two investment alternatives, each costing $100,000. The first alternative generates $35,000 a year for four years. The second pays one large lump sum of $158,800 at the end of the fourth year. If the firm can raise the required funds to make the investment at an annual cost of 9 percent, what are the present values of two investment alternatives? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar. PV_{(First alternative)}: $ PV_{(Second alternative)}: $

Which alternative should be preferred? The -Select-firstsecondItem alternative should be preferred.

25.

You wish to retire in 11 years and currently have $80,000 in a savings account yielding 5 percent annually and $110,000 in quality "blue chip" stocks yielding 9 percent. If you expect to add $40,000 at the end of each year to your stock portfolios, how much will you have in your retirement fund when you retire? Use Appendix A and Appendix C to answer the question. Round your answer to the nearest dollar. $

What rate of return must you earn on your retirement funds if you want to withdraw $109,000 per year for the next 15 years after retiring? Use Appendix D to answer the question. Round your answer to the nearest whole number. %

26. Uncle Fred recently died and left $310,000 to his 50-year-old favorite niece. She immediately spent $110,000 on a town home but decided to invest the balance for her retirement at age 65. What rate of return must she earn on her investment over the next 15 years to permit her to withdraw $60,000 at the end of each year through age 85 if her funds earn 9 percent annually during retirement? Use Appendix A and Appendix D to answer the question. Round your answer to the nearest whole number. %

27.

A $1,000,000 state lottery prize is spread evenly over ten years ($100,000 a year) (Alternative 1), or you may take a lump distribution of $741,000 (Alternative 2). If you can earn 6 percent, calculate the present values of both alternatives. Use Appendix D to answer the question. Round your answers to the nearest dollar. PV_{(Alternative 1)}: $ PV_{(Alternative 2)}: $

Which alternative is better? -Select-Alternative 1Alternative 2

28.

You contribute $1,500 annually to a retirement account for nine years and stop making payments at the age of 40. Your twin brother (or sister . . . whichever applies) opens an account at age 40 and contributes $1,500 a year until retirement at age 65 (25 years). You both earn 8 percent on your investments. How much can each of you withdraw for 20 years (that is, ages 66 through 85) from the retirement accounts? Use Appendix A, Appendix C, and Appendix D to answer the question. Round your answers to the nearest dollar. You can withdraw $ . Your twin can withdraw $ .

29. AIR National's capacity is 130 passengers per flight. It currently carries 74 passengers per flight. Growth in passengers is expected to be 6 percent annually. New planes will have to be ordered when the company is carrying 80 percent of capacity. How long will it be before the firm must order new planes? Use Appendix A to answer the question. Round your answer to the nearest whole number. years

30.

Firm X buys equipment for $7,000 and leases the equipment to firm A for $800 a year for five years. After five years, firm X expects to sell the asset for $6,000. What is the return that firm X earns on the lease? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest whole number. %

31.

Use a financial calculator or a program such as Excel to answer the questions. Round your answers to the nearest whole number.

You purchase a stock for $12,000 and collect $450 at the end of each year in dividends. You sell the stock for $13,100 after three years. What was the annual return on your $12,000 investment? %

You purchase a building for $850,000, collect annual rent (after expenses) of $135,000, and sell the building for $1,000,000 after five years. What is the annual return on this investment? %

You buy a stock for $1,000 and expect to sell it for $930 after three years but also expect to collect dividends of $140 a year. Calculate the return on this investment and prove that it is less than 13 percent. %