The following problems are to be performed in Excel.

2. Your generous grandmother has just announced that shes opened a savings account for you

with a deposit of $10,000. Moreover, she intends to make you 9 more similar gifts, at the end of

this year, next year, etc. If the savings account pays 8% interest, how much will you have

accumulated at the end of 10 years (one year after the last gift)?

3. Your uncle has just announced that hes going to give you $10,000 per year at the end of each

of the next 4 years (hes less generous than your grandmother ...). If the relevant interest rate is

7%, whats the value today of this promise? (If youre going to use PV to do this problem note

that the Type option is 0 or omitted.)

5. Screw-Em-Good Corp. has just announced a revolutionary security: If you pay SEG $1,000

now, you will get back $150 at the end of each of the next 15 years. What is the IRR of this investment?

7. You are thinking about buying a $1,000 bond issued by the Appalachian Development

Authority (ADA). The bond will pay $120 interest at the end of each of the next 5 years. At the

end of year 6, the bond will pay $1,120 (this is its face value of $1,000 plus the interest). If the

relevant discount rate is 7%, how much is the present value of the bonds future payments?

12. You receive a $15,000 signing bonus from your new employer and decide to invest it for

two years. Your banker suggests two alternatives, which both require a commitment for the full

two years. The first alternative will earn 8% per year for both years. The second alternative earns

6% for the first year, and 10% for the second year. Interest compounds annually.

Which should you choose?

13. Your annual salary is $100,000. You are offered two options for a severance package.

Option 1 pays you 6 months salary now. Option 2 pays you and your heirs $6,000 per year

forever (first payment at the end of this year). If your required return is 11 percent, which option

should you choose?

16. John is turning 13 today. His birthday resolution is to start saving towards the purchase of a

car that he wants to buy on his 18th birthday. The car costs $15,000 today, and he expects the

price to grow at 2% per year.

John has heard that a local bank offers a savings account which pays an interest rate of

5% per year. He plans to make 6 contributions of $1,000 each to the savings account (the first

contribution to be made today); he will use the funds in the account on his 18th birthday as a

down payment for the car, financing the balance through the car dealer.

He expects the dealer to offer the following terms for financing: 7 equal yearly payments

(with the first payment due one year after he takes possession of the car); an annual interest rate

of 7%.

16.a. How much will John need to finance through the dealer?

16.b. What will be the amount of his yearly payment to the dealer?

17. Mary has just completed her undergraduate degree from Northwestern University and is

already planning on entering an MBA program four years from today. The tuition will be

$20,000 per year for two years, paid at the beginning of each year. In addition, Mary would like

to retire 15 years from today and receive a pension of $60,000 every year for 20 years and

receive the first payment 15 years from today. Mary can borrow and lend as much as she likes at

a rate of 7%, compounded annually. In order to fund her expenditures, Mary will save money at

the end of years 1-3 and at the end of years 6-14.

Calculate the constant annual dollar amount that Mary must save at the end of each of

these years to cover all of her expenditures (tuition and retirement)?

18. You are the CFO of Termination, Inc. Your company has 40 employees, each earning

$40,000 per year. Employee salaries grow at 4% per year. Starting from next year, and every

second year thereafter, 8 employees retire and no new employees are recruited. Your company

has in place a retirement plan that entitles retired workers to an annual pension which is equal to

their annual salary at the moment of retirement. Life expectancy is 20 years after retirement, and

the annual pension is paid at year-end. The return on investment is 10% per year. What is the

total value of your pension liabilities?

19. You are 30 today and are considering studying for an MBA. You just received your annual

salary of $50,000 and expect it to grow by 3% per year. MBAs typically earn $60,000 upon

graduation, with salaries growing by 4% per year.