## Principles of Finance

Goal 5: Business

Professionals

Objective 2: Students

will demonstrate foundational knowledge in the core business discipline.

BUS

3331 (Principles of Finance)

Time

Value of Money Assignment (10 Questions)

This individual problem

solving assignment is for Chapter 5: Time Value of Money (TVM) assignments.

There are 10 questions and each question is 4 points. Totally, this assignment

accounts for **4 x10 = 40 points**. For each question, please show your work to reach

the answers rather than just report the answers. Please use another sheet of

paper, if necessary.

1. Colin has inherited $6,000 from the

death of Grandma Anna. He would like to use this money to buy his mom Hayley a

new scooter costing $7,000 2 years from now. Will Colin have enough money to

buy the gift if he deposits his money in an account paying 8 percent compounded

semi-annually?

2. A wealthy industrialist wishes to

establish a $2,000,000 trust fund which will provide income for his grandchild

into perpetuity. He stipulates in the trust agreement that the principal may

not be distributed. The grandchild may only receive the interest earned. If the

interest rate earned on the trust is expected to be at least 7 percent in all

future periods, how much income will the grandchild receive each year?

3. Mr. Knowitall has been awarded a

bonus for his outstanding work. His employer offers him a choice of a lump-sum

of $5,000 today, or an annuity of $1,250 a year for the next five years. Which

option should Mr. Knowitall choose if his opportunity cost is 9 percent?

4. You received $100 at the

beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at

the beginning of year 3. If these cash flows are deposited at 12 percent, what is the combined future value of

the cash flows at the end of year 3?

5. You have provided your

friend with a service worth $8,500. Your friend offers you the following cash

flow instead of paying $8,500 today. Should you accept his offer if your

opportunity cost is 8

percent?

6.

Jia

borrows $50,000 at 10 percent annually compounded interest to be repaid in four

equal annual installments. What is the amount of each

annual installment payment?

- Xiao Xin is

planning to accumulate $40,000 by the end of 5 years by making 5 equal

annual deposits. If she plans to make her first

deposit today and can earn an annual compound rate of 9 percent on

her investment, how much must each deposit be in order to accumulate the

$40,000?

- Thelma is

planning for her son’s college education to begin five years from today.

She estimates the yearly tuition, books, and

living expenses to be $5,000 per year for a four-year degree. How much

must Thelma deposit today, at an interest rate of 8 percent, for her son

to be able to withdraw $5,000 per year for four years of college?

- Rita

borrows $4,500 from the bank at 9 percent annually compounded interest to

be repaid in three

equal annual installments. The interest paid in the third year is ________.

- Marc has

purchased a new car for $15,000. He paid $2,500 as down payment and he

paid the balance by a loan from his hometown bank. The loan is to be paid

on a monthly basis for two years charging 12 percent interest. How much

are the monthly payments?