Question 1

Sam has won a lottery. He can take $5,000 now or $5,500 in one year. If money can earn 8%, which option should he choose?

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Question 2

What is meant by the "present value" of a payment that is scheduled for a future date?

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Question 3

Two payments of $3,000 each are due in 50 and 100 days. What is their combined economic value today if money can earn:
a) 9%?
b) 11%?
c) Explain why the answer in part (b) is smaller.

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Question 4

A large retail store offers a payment plan of no interest with 50% down and the balance in six months on a minimum purchase of $500. If money can earn 3.25%, how much of a discount should a buyer receive on a purchase of $2,000 if paid in full at the time of purchase?

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Question 5

A $3,000 payment is scheduled for 6 months from now. If money is worth 6.75%, calculate the payment's equivalent values at two-month intervals beginning today and ending one year from now.

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Question 6

Mr. and Mrs. Chan are considering two offers on a building lot that they own in a nearby town. One is for $49,000, consisting of $10,000 down and the balance to be paid in a lump payment in eight months. The second is for $50,000, with $10,000 down and the balance to be paid in 1 year. What rate of return must money earn for Mr. and Mrs. Chan to be indifferent between the two offers?

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Question 7

What single payment, 45 days from now, is economically equivalent to the combination of three payments of $1750 each: one due 75 days ago, the second due today, and the third due in 75 days from now? Money is worth 9.9% per annum.

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Question 8

What amount paid on September 24 is equivalent to $1,000 paid on the following December 1 if money can earn 3%?

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Question 9

Determine a) whether the earlier or later payment has the greater economic value at the given interest rate and b) the interest rate at which the two payments would be equivalent:

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Question 10

If the interest rate money can earn is revised upward, will a scheduled payment's present value be higher or lower? Explain.

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Question 11

Calculate the equivalent value of the scheduled payments if money can earn the rate of return specified in the last column. Assume that any payments due before today have been missed.

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Question 12

A $5,000 payment is scheduled for 120 days from now. If money can earn 7.25%, calculate the payment's equivalent value at each of nine different dates: today and every 30 days for the next 240 days.

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Question 13

What interest rate must money earn for a payment of $1,389 on August 20 to be equivalent to a payment of $1,348 on the previous March 29?

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Question 14

Two payments of $2,000 each are to be received six and twelve months from now. If money is worth 10%, what is the total equivalent value of the payments:
a) Today?
b) Six months from today?
c) Explain why the answer in part (b) is larger.

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Question 15

How can you determine which of three payments has the largest economic value?

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Question 16

A large retail store offers no payments, no interest for six months on all furniture and appliance purchases exceeding $1,500. If money can earn 3.5%, how much should the store accept as a payment today on furniture costing $1,850?

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Question 17

If the interest rate money can earn is revised upward, is today's economic value of a stream of future payments higher or lower? Explain.

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Question 18

Under what circumstance is $100 paid today equivalent to $110 paid 1 year from now?

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Question 19

How can you determine whether two payments are equivalent to each other?

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Question 20

What payment on August 19 is equivalent to a $1,000 payment on the preceding January 19, if the rate of interest is 4.5%?

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Quiz 6: Simple Interest