Question 1

An investor has a choice of three investments, 6.85% compounded quarterly, 7% pa, and 6.6% compounded monthly. Which rate should the investor choose?

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Question 2

Calculate the missing value:

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Question 3

Carla has decided to purchase a $30,000 car. She can either liquidate some of her investments and pay cash, or accept the dealer's terms of $7,000 down and successive payments of $10,000, $9,000, and $8,000 at the end of each of the next three years.
a) Which choice should Carla make if she can earn 7% compounded semi-annually on her investments? In current dollars, how much is the economic advantage of the preferred alternative?
b) Which choice should Carla make if she can earn 10% compounded semi-annually on her investments? In current dollars, how much is the economic advantage of the preferred alternative?

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Question 4

Henri has decided to purchase a $25,000 car. He can either liquidate some of his investments and pay cash, or accept the dealer's proposal that Henri pay $5,000 down and $8,000 at the end of each of the next three years.
a) Which choice should Henri make if he can earn 5% compounded semi-annually on his investments? In current dollars, what is the economic advantage of the preferred alternative?
b) Which choice should Henri make if he can earn 11% compounded semi-annually on his investments? In current dollars, what is the economic advantage of the preferred alternative?
(Hint: When choosing among alternative streams of cash inflows, we should select the one with the greatest economic value. When choosing among alternative streams of cash outflows, we should select the one with the least economic value.)

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Question 5

Joe Superstar has just signed a "four-year, $68-million deal" with the Toronto Blue Jays. The terms of the contract include a signing bonus of $4.8 million and salaries of $10 million, $17.2 million, $17.5 million, and $18.5 million in successive years of the contract. The news media always ignore the time value of money when they report the "value" of professional athletes' contracts. What is the economic value of Joe's contract on the date it was signed? Assume that the signing bonus was paid on that date, that the annual salaries will be paid in lump amounts ½ year, 1 ½ years, 2 1/2 years, and 3 ½ years later, and that money is worth 5% compounded semi-annually. Round the answer to the nearest $1,000.

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Question 6

Calculate the missing value:

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Question 7

A lottery prize gives the winner a choice between (1) $10,000 now and another $10,000 in 5 years, or (2) four $7,000 payments: now and in 5, 10, and 15 years.
a) Which alternative should the winner choose if money can earn 6% compounded annually? In current dollars, what is the economic advantage of the preferred alternative?
b) Which alternative should the winner choose if money can earn 8.5% compounded annually? In current dollars, what is the economic advantage of the preferred alternative?

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Question 8

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made.

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Question 9

Jarmila borrowed $3,000, $3,500, and $4,000 from her grandmother on December 1 in each of three successive years at college. They agreed that interest would accumulate at the rate of 4% compounded semi-annually. Jarmila is to start repaying the loan on June 1 following the third loan. What consolidated amount will she owe at that time?

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Question 10

Patrice defaulted on payments of $1,000 due one year ago and $1,500 due six months ago. A Small Claims Court orders her to make three payments-$800 one month from now, $900 four months from now, and a third payment seven months from now. The third payment is to be determined so that the creditor will end up in the same economic position as if the original payments had been made on time. The court set the fair rate of return at 4.2% compounded monthly. What should the third payment be?

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Question 11

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made.

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Question 12

Calculate the missing value:

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Question 13

A two-payment stream consisting of $1,750 due today and $2,900 due in 18 months is to be replaced by an economically equivalent stream comprised of an undetermined payment due in 9 months and a payment of $3,000 due in 19 months. Calculate the unknown replacement payment if money is worth 4.2% compounded monthly.

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Question 14

Miquel was supposed to make three payments of $2,000 each-the first one year ago, the second one year from now, and the third three years from now. He missed the first payment and proposes to pay $3,000 today and a second amount in two years. If money can earn 4.5% compounded semi-annually, what must the second payment be to make the proposed payments equivalent to the scheduled payments?

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Question 15

Donnelly Excavating has received two offers on a used backhoe that Donnelly is advertising for sale. Offer 1 is for $10,000 down, $15,000 in six months, and $15,000 in 18 months. Offer 2 is for $8,000 down plus two $17,500 payments one and two years from now. What is the economic value of each offer today if money is worth 4.25% compounded semi-annually? Which offer should be accepted?

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Question 16

The owner of a residential building lot has received two purchase offers. Mrs. A is offering a $20,000 down payment plus $40,000 payable in one year. Mr. B's offer is $15,000 down plus two $25,000 payments due one and two years from now. Which offer has the greater economic value if money can earn 9.5% compounded quarterly? How much more is it worth in current dollars?

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Question 17

Scheduled payments of $3,000 due today and $2,000 due in 15 months are to be replaced by two payments-$1,500 due in 15 months and a second payment of undetermined size due in 24 months. What must the second payment be for the two streams to be economically equivalent? Assume that money can earn 6% compounded quarterly.

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Question 18

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made.

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Question 19

What would be the most convincing way to demonstrate that the replacement stream in Example 8.6A is economically equivalent to the given stream?

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Question 20

CompuSystems was supposed to pay a manufacturer $19,000 on a date 4 months ago and another $14,000 on a date two months from now. CompuSystems is proposing to pay $10,000 today and the balance in 5 months, when it will receive payment on a major sale to the provincial government. What will the second payment be if the manufacturer requires 6% compounded monthly on overdue accounts?

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Quiz 8: Compound Interest: Future Value and Present Value

An investor has a choice of three investments, 6.85% compounded quarterly, 7% pa, and 6.6% compounded monthly. Which rate should the investor choose?

Calculate the missing value:

Calculate the missing value:

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made.

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made.

Calculate the missing value:

Calculate the combined equivalent value of the scheduled payments on the indicated dates. The rate of return that money can earn is given in the fourth column. Assume that payments due in the past have not yet been made.

What would be the most convincing way to demonstrate that the replacement stream in Example 8.6A is economically equivalent to the given stream?