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?

 

 

  1. 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?

 

 

  1. 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?

 

 

  1. 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 ________.

 

 

  1. 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?