Assignments_chapter04_TVM - Compatibility Mode Saved to my Mac s Mailings Review View RCM Tell me A. A B C DdEe MaBbDM Ee AaBbCcD AaBbCcD AL ta v Normal No Spacing Heading 1 Heading Formulas: 1) FV=PV (1+R) N (Single Cash Flow TVM) 2) Simple Interests Earned -PVXRXN Example to demonstrate the format to answer calculation problems: Question: Grace Grone's three shares of Abbott Laboratories stock increased its value from $180 to $7 million from 1935 to 2010 (75-year period). What is the average yearly return of this investment? Steps to answer the questions: Formula to use: 1 Plug in numbers: PV=180; FV=7,000,000; N=75; Answer: R=15.13% Or copy and paste (special as picture) 15.13% R N PMT PV FV 75 0 -180 7,000,000 1. First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually. If you made an $8,000 savings deposit in each bank, how much money would you have at the end of 10th year in each bank? What creates the value difference in these two accounts? First City Bank: Formula: Plug in: Answer: Second City Bank: Formula: Plug in: Answer: Difference and Reason: Normal No Spacing Heading 2 Difference and Reason: 2. You have just received notification that you have won the $1 million first prize in the Centennial Lottery. However, the lottery company told you that the S1 million prize would be awarded 30 years from now, or if you choose to get the prize right now, you could only get $300,000. Why is there a cash amount difference in these two options? Which option would you choose and why? (You can use some reasonable assumptions to answer this question.) MB338 Finance 3. Your coin collection contains 50 silver dollars issued in 1952. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2062, assuming the coins appreciate at a 5.7 percent annual rate? 4. Suppose you are committed to owning a $160,000 Ferrari. If you believe your mutual fund can achieve a 6.25 percent annual rate of return, and you want to buy the car in 10 years on the day you turn 30, how much must you invest today? 5. You have just made your first $5,000 contribution to your individual retirement account (IRA). Assuming you cam a 10.5 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? Does this suggest an investment strategy? 6. You have decided that you want to be a millionaire when you retire in 45 years. If you can earn an 11 percent annual return, how much do you have to invest today? What if you can earn 5.5 percent? 7. You are scheduled to receive $13,000 in two years. When you receive it, you will invest it for six more years in a fund that offers 6 percent return per year. How much will you have in eight years? 8. You have $90,000 to deposit. Regency Bank offers 6 percent per year compounded monthly (0.5 percent per month), while King Bank offers 6 percent but will only compound annually. How much will your investment be worth in 20 years at each bank? 9. An investment offers to quadruple your money in 24 months (don't believe it). What rate per three months are you being offered? FC
