FIN 3100 Principles of Corporate Finance Module 5 Homework (Time Value of Money) 1. Single Sum. If you put $10,000 in a bank account today and let it stay there for the next 30 years until you retire, how much will you have if you can earn a 10% return and it is compounded monthly? 2. Single Sum vs. Annuity. Your friend Kimball has just won the lottery! He can either receive $25,000 per year for the next 25 years or can receive $300,000 today. Knowing that you are taking Fin 201, Kimball asks you for your advice on which option would be better. If he can receive a 7.5 percent return on any investment, what advice would you give him to maximize the amount of money he will receive? 3. Interest. You want to obtain a car loan for $5,000 to be repaid in 12 monthly installments of $500. The annual interest rate is what? 4. Monthly Payment. You are considering obtaining a student loan for $7,500 which upon graduation will need to be repaid over the next 10 years at a fixed interest rate of 6.0%. What would be your monthly payment once you begin repaying the loan? 5. Principle versus Interest. Based on the student loan scenario in # 4, how much interest would you end up paying over the life of the loan? 6. Uneven Cash Flows. Gold Bicycle Co. is considering investing in the production and sale of electric bicycles. The company anticipates that in years 1-3 it will earn $25,000 per year and in years 4-6 it will earn $50,000 per year. The electric bike division could then be sold at the end of year 6 for $150,000. In present value terms, what is this investment worth today (i.e. how much would the company be willing to pay to do it) if Gold Bicycle has a required return rate of 12%? 7. Employer Matching Retirement Account. Jason wants to save $1,000,000 for his retirement. If he has 30 years until retirement and his employer will match 50 cents to every dollar he invests in his 401k plan, how much must Jason invest each month to have enough at retirement assuming he can earn a 7% return. 8. Annuity Due. For the use of some equipment, Zipster Inc. obtains a loan where payments will be due at the beginning of each period starting in time 0. If Zipster pays $3,000 a month for 5 years and the bank requires an interest rate of 4.5% annually, what is the present value of the loan? 9. Perpetuity. Monsters University is considering starting an endowment that would help fund one of its colleges. If it can earn a 10% return on its investments and wants to withdraw $10,000 a year, how large does the endowment need to be? 10. Loan Comparison. You are buying a house for $250,000 and are considering whether you should get a 15-year mortgage at 3.750% interest rate or a 30-year mortgage at 4.625% interest rate both with monthly mortgage payments. How much interest would you end up paying with each loan? How much could you save in interest by taking one loan over the other
