Chapter 4

Problems 1-76

Input boxes in tan

Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.
To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak"
and "Solver Add-In."
sis ToolPak"
Chapter 4
Question 1

Input area:

Interest rate 7%
Deposit $ 5,000
# of years 10

Output area:

Compound interest $ 9,835.76

Simple interest $ 8,500.00

Difference = $ 1,335.76
 Chapter 4
Question 2

Input area:

Present value $ 1,000

Years Rate
a. 10 5%
b. 10 7%
c. 20 5%

Output area:

a. Future value $1,628.89

b. Future value $1,967.15

c. Future value $2,653.30

Chapter 4
Question 3

Output area: Input area:

Present value Years Interest rate Future value

$ 11,529.77 6 5% $ 15,451
$ 20,154.91 9 11% 51,557
$ 61,266.87 18 16% 886,073
$ 10,067.28 23 19% 550,164
Chapter 4
Question 4

Input area: Output area:

Present value Years Interest rate Future value

$ 265 2 7.63% $ 307
360 9 10.66% 896
39,000 15 9.97% 162,181
46,523 30 8.12% 483,500
Chapter 4
Question 5

Input area: Output area:

Present value Years Interest rate Future value

$ 625 9.36 8% $ 1,284
810 24.81 7% 4,341
18,400 16.19 21% 402,662
21,500 8.20 29% 173,439
Chapter 4
Question 6

Input area: Output area:

Present value Years Interest rate Future value

$ 1.00 10.24 7% $ 2.00
1.00 20.49 7% 4.00
Chapter 4
Question 7

Output area: Input area:

Present value Years Interest rate Future value

$ 130,258,959.12 20 9.50% $ 800,000,000
Chapter 4
Question 8

Output area: Input area:

Present value Years Interest rate Future value

$ 52,827.67 10 11.0% $ 150,000
Chapter 4
Question 9

Input area:

Annual payments $ 120

Interest rate 15%

Output area:

Present value $ 800.00

 Chapter 4
Question 10

Input area:

Present value $ 1,000

Years Rate
a. 5 12%
b. 3 10%
c. 10 5%
d. 8 7%

Output area:

a. Future value $1,822.12

b. Future value $1,349.86

c. Future value $1,648.72

d. Future value $1,750.67

Chapter 4
Question 11

Input area:
Output area:

Discount rate 24%

Year Cash flow

1 $ 1,200
2 600
3 855
4 1,480
$ 2,432.40
Chapter 4
Question 12

Input area:

Discount rate 5%

# of years for X 9
# of years for Y 5

Payment for X $ 4,000

Payment for Y 6,000

Output area:

Value of X = $ 28,431.29

Value of Y = $ 25,976.86
Chapter 4
Question 13

Input area:

Required rate of return 10%

# of years 15
Payment per year $ 3,600

Output area:

Present value $ 27,381.89

PV (forever) $ 36,000.00
Chapter 4
Question 14

Input area:

Interest rate 8%
Desired amount $ 15,000

Cost of policy $ 195,000

Output area:

Present value = $ 187,500.00

Required interest rate = 7.69%

Chapter 4
Question 15

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

11% 4 11.46%
7% 12 7.23%
9% 365 9.42%
17% Infinite 18.53%
0.114621259414
Chapter 4
Question 16

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

7.94% 2 8.10%
7.35% 12 7.60%
15.55% 52 16.80%
23.27% Infinite 26.20%
Chapter 4
Question 17

Input area:
Output area:

Stated rate (APR) # of times per year Effective rate

First National Bank 12.2% 12 12.91%
First United Bank 12.4% 2 12.78%
Chapter 4
Question 18

Input area:

Cost per bottle $ 10

Discount per case 10%
Bottles in a case 12

Output area:

Cost per case $ 108.00

Interest rate per week 1.98%

APR 102.77%

EAR 176.68%
Chapter 4
Question 19

Input area:

Discount rate 0.9%

Current balance $ 16,500.00
Monthly payment 500

Output area:

# of months until paid off 39.33

Chapter 4
Question 20

Input area:

Present value $3
Future value 4

Output area:

Interest rate per week 33.33%

APR 1733.33%

EAR 313916515.69%
 Chapter 4
Question 21

Input area:

Present value $ 1,000

Interest rate 8%
Years 3
Compounding Frequency

a. Annual 1
b. Semi-annual 2
c. Monthly 12
d. Continuously Infinite

Output area:

a. Future value $1,259.71

b. Future value $1,265.32

c. Future value $1,270.24

d. Future value $1,271.25

Chapter 4
Question 22

Input area:

Interest rate per quarter 8%

# of years 10

Output area:

First Complex Bank interest rate = 6.05%

Chapter 4
Question 23

Input area:

Monthly stock investment $ 700

Monthly bond investment $ 300
Stock return 11%
Bond return 7%
Years to save 30
Retirement return 9%
Retirement years 25

Output area:

FV of stock account $ 1,963,163.82

FV of bond account $ 365,991.30
Total account FV $ 2,329,155.11

Monthly withdrawal $ 19,546.19

Chapter 4
Question 24

Input area:

Present value $ 1
Future value $ 3
Number of periods 1

Output area:

Effective annual rate 200.00%

Annual percentage rate 126.43%

Quarterly return 31.61%

Chapter 4
Question 25

Input area:

Up-front costs $ 50,000

Return on investment G $ 85,000

# of years 5

Return on investment H $ 175,000

# of years 11

Output area:

Return on investment G 11.20%

Return on investment H 12.06%

Chapter 4
Question 26

Input area:

First cash flow $ 200,000

Years until first payment 2
Growth rate 5%
Discount rate 10%

Output area:

Value one period before

first payment $ 4,000,000.00

Value today $3,636,363.64

Chapter 4
Question 27

Input area:

First quarterly dividend $ 10

Stated interest rate 12%

Output area:

Value today $333.33

Chapter 4
Question 26

Input area:

Annuity payment $ 2,000

Year of first payment 3
Year of last payment 22
Discount rate 8%

Output area:

Value one period before

first payment $ 19,636.29

Value today $16,834.96

Chapter 4
Question 29

Input area:

Annuity payment $ 500

Number of payments 15
Years until first payment 6
Rate for first X years 12%
Rate for payment years 15%

Output area:

Value one period before

first payment $ 2,923.69

Value today $1,658.98

Chapter 4
Question 30

Input area:

Amount of loan $ 180,000

Down payment 15%
APR 7.5%
# of years 20

Output area:

Amount borrowed $ 153,000

Monthly payment $ 1,232.56

Chapter 4
Question 31

Input area:

Interest rate first six months 1.90%

Interest rate thereafter 16%
# of times compounded 12
Balance transferred $ 4,000

Output area:

Accrued interest = $ 372.16

Chapter 4
Question 32

Input area:

Cost $ 240,000
Perpetual cash flow $ 21,000

Output area:

Interest rate 8.75%

Chapter 4
Question 33

Input area:

Cost of revision $ 50,000

Increased cash flow 12,000
Years for cash flow 5
Cash flow growth rate 6%
Interest rate 11%

Output area:

Present value of cash flows $ 49,398.78

The company should not do the revision.

Chapter 4
Question 34

Input area:

Current salary $ 50,000

Salary growth rate 2%
Return 8%
Salary increase 4%
Deposit length 40

Output area:

Next year's salary $ 52,000

Next year's deposit $ 1,040

Present value deposits $ 20,254.12

Future value of deposits $ 440,011.02

Chapter 4
Question 35

Input area:

Annuity payment per year $ 5,000

# of years 10
Interest rate 10%

Output area:

Value of investment $ 30,722.84

Present value falls as r increases, and rises as r decreases.

Future value rises as r increases, and falls as r decreases.
Chapter 4
Question 36

Input area:

Monthly payment $ 125.00

Future value of account 20,000
Interest rate 10%

Output area:

Number of payments 102.10

Chapter 4
Question 37

Input area:

Monthly payment $ 950

Price of sailboat 45,000
Number of months 60

Output area:

Maximum interest rate 9.72%

Chapter 4
Question 38

Input area:

Monthly payment $ 1,000

Price of house 200,000
Number of months 360

APR 6.8%

Output area:

Present value of payments $ 153,391.83

Balloon payment $ 356,387.10

Chapter 4
Question 39

Input area:

PV of cash flows $ 5,979

Year Cash flow
1 $ 1,000
2 $ -
3 $ 2,000
4 $ 2,000

Discount rate 10%

Output area:

Year PV
1 $ 909.09
2 $ -
3 $ 1,502.63
4 $ 1,366.03
Total $ 3,777.75

PV of missing CF $ 2,201.25

Value of missing CF $ 2,663.52

Chapter 4
Question 40

Input area:

First payment $ 1,000,000

Annual increase 400,000

Discount rate 10%

Output area:

Year Payments Present Value

0 $ 1,000,000 $ 1,000,000.00
1 1,400,000 $ 1,272,727.27
2 1,800,000 $1,487,603.31
3 2,200,000 $ 1,652,892.56
4 2,600,000 $ 1,775,834.98
5 3,000,000 $ 1,862,763.97
6 3,400,000 $ 1,919,211.36
7 3,800,000 $ 1,950,000.85
8 4,200,000 $ 1,959,331.00
9 4,600,000 $ 1,950,849.04
10 5,000,000 $ 1,927,716.45
Present value $ 18,758,930.79
Chapter 4
Question 41

Input area:

Monthly payment $ 10,000

Price of warehouse 1,600,000
Percentage of pruchase price 0.80
Number of years 30

Output area:

Amount of loan $ 1,280,000

Interest rate per month 0.72%

APR 8.67%

EAR 9.03%
Chapter 4
Question 42

Input area:

Selling price $ 115,000

Production cost 72,000
# of years until sale 3
Discount rate 13.0%

Output area:

Present value of sale $ 79,700.77

Profit (loss) $ 7,700.77

Breakeven rate 16.89%

Chapter 4
Question 43

Input area:

Annual payment $ 2,000

Year for last payment 25
# of years delay before first payment 9

Discount rate 12%

Output area:

PV at beginning of payments = $14,239.26

Value today = $5,751.00

Chapter 4
Question 44

Input area:

Monthly payment $ 1,500

# of years 15

Interest rate 1 15%

# of years 7

Interest rate 2 12%

# of years 8

Output area:

Present value of payments at interest rate 1 = $ 77,733.28

Present value of payments at interest rate 2 = $ 32,507.18

Total present value of the annuity = $ 110,240.46

Chapter 4
Question 45

Input area:

Investment A:
Monthly payment $ 1,000
# of years 15
Interest rate 10.50%

Investment B:
# of years 15
Interest rate 9%

Output area:

Future value of investment A = $ 434,029.81

Lump sum needed = $ 112,518.00

Chapter 4
Question 46

Input area:

Amount of payment $ 3,000

# of years until payments begin 15
# of years value is to be calculated 7
Interest rate 6.5%

Output area:

Present value of perpetual stream = $ 46,153.85

Present value at requested year = $29,700.29

Chapter 4
Question 47

Input area:

Amount borrowed $ 20,000

Monthly payment 1,900.00
Periods/year 12
Quoted interest rate 14%

Output area:

Monthly rate = 2.076%

APR = 24.91%

EAR = 27.96%
Chapter 4
Question 48

Input area:

Amount of semiannual payment $ 6,000

# of years 5
# of years until first payment 9.50
Discount rate 12%
Compounding periods per year 12
Year to find present value 5

Output area:

Semiannual interest rate 6.15%

PV of annuity at year 9 $ 43,844.21

Effective annual rate 12.68%

Present value at requested year $27,194.83

 Chapter 4
Question 49

Input area:

Annual payment $ 525

# of years 6
Discount rate 9.50%

Output area:

a. Present value of annuity = $ 2,320.41

b. Present value of annuity due = $ 2,540.85

Chapter 4
Question 50

Input area:

Value of lease contract $ 56,000

# of months 48
APR 8.15%

Output area:

Monthly payment = $1,361.82

Chapter 4
Question 51

Input area:

Cost of clubs $ 4,000

# of months 24
APR 12.00%

Output area:

Monthly payment $ 186.43

Chapter 4
Question 52

Input area:

Year oldest child enters college 15

Year youngest child enters college 17
Annual college expenses $ 23,000
Interest rate 6.5%

Output area:

PV of oldest child's expenses $ 32,628.35

PV of youngest child's expenses $ 28,767.09

PV of both children's expenses $ 61,395.44

Annual savings required $ 6,529.58

Chapter 4
Question 53

Input area:

First year salary $ 35,000

First year bonus $ 10,000
Salary growth rate 4%
Bonus percentage 10%
Years of work 25
Discount rate 12%

Output area:

PV of salary $ 368,894.18

Next year's bonus $ 3,500.00

PV bonus $ 36,889.42

Present value $ 415,783.60

 Chapter 4
Question 54

Input area:

a. Number of payments 31
Annual payment $ 160,000
Tax rate 28%
b. Payment today $ 446,000
Annual payments $ 101,055
Number of annual payments 30
Tax rate 28%

Disount rate 10%

Output area:

a. Aftertax payments $ 115,200.00

PV of Option A $1,201,180.55

b. Aftertax payments $ 72,759.60

PV of option B $1,131,898.53

You should choose Option A.

Chapter 4
Question 55

Input area:

Years until retirement 30

Next year's salary $ 55,000
Salary growth rate 3%
Investment return 10%
Desired retirement value $ 1,000,000

Output area:

PV of retirement value $ 57,308.55

Amount to save next year $ 4,659.79

Pecentage of salary 8.47%

Chapter 4
Question 56

Input area:

Cost of motorcycle $ 15,000

Down payment $ 1,000
Years for loan 5
Interest rate 9.6%
Months left on loan 35
Prepayment penalty 1%

Output area:

Monthly payment $ 294.71

Ballon payment without penalty $ 9,037.33

Total amount of balloon payment $ 9,127.71

Chapter 4
Question 57

Input area:

Years until retirement 30

Years in retirement 20
Monthly retirement income $ 25,000
Years until cabin purchase 10
Cabin price $ 350,000
Inheritance $ 750,000
Monthly savings for first years $ 2,100
Years with initial savings amount 10
Pre-retirement EAR 11%
Retirement EAR 8%

Output area:

Pre-retirement APR 10.48%

Retirement APR 7.72%

Savings value until cabin purchase $ 442,239.69

Savings after cabin purchase $ 92,239.69

PV of retirement spending $ 2,507,174.66

PV of inheritance $ 160,911.16

Amount needed at retirement $ 3,212,854.41

Savings needed per month $ 3,053.87

Chapter 4
Question 58

Input area:

Years for lease 3

Car price $ 35,000
Payment today $ 1
Monthly lease payment $ 450
Resale price $ 23,000
Loan rate 8%

Output area:

PV of lease payments $ 14,361.31

PV of resale price $ 18,106.86

PV of purchase $ 16,893.14

You should Lease

the car since the PV is lower.

Breakeven resale price $ 26,216.03

Chapter 4
Question 59

Input area:

Year
0 $ 8,000,000
1 $ 4,000,000
2 $ 4,800,000
3 $ 5,700,000
4 $ 6,400,000
5 $ 7,000,000
6 $ 7,500,000

Requested signing bonus $ 9,000,000

Requested salary increase $ 750,000
Interest rate 4.5%
Compunding periods 365

Output area:

EAR 4.60%

PV of salary offer $ 37,852,037.91

PV of salary with increase $ 38,602,037.91

Effective quarterly interest rate 1.131%

Quarterly salary $1,415,348.37

Chapter 4
Question 60

Input area:

Amount of loan $ 20,000

# of years 1
APR 12%

Output area:

Amount received = $ 17,600.00

EAR = 13.64%
Chapter 4
Question 61

Input area:

Salary for 2 years ago $ 40,000

Last year's salary 43,000
Future salary 45,000
Years for future salary 5
Pain and suffering 100,000
Court costs 20,000
EAR 9%

Output area:

APR 8.65%

Value today of salary 2 yrs ago $ 45,370.52

Value today of last year's salary $ 44,746.15
Value of next 5 year's salary $ 182,142.14

Total value awarded $ 392,258.81

Chapter 4
Question 62

Input area:

Amount of loan $ 10,000

# of years 1
APR 10%
Points 3%

APR 13%
Points 2%

Output area:

EAR 13.40%

EAR 15.31%

The effective rate is not affected by the loan amount,

since it drops out when solving for R.
Chapter 4
Question 63

Input area:

Amount of loan $ 200,000

# of years 30
Interest rate 7.50%
Fees $ 1,500

Output area:

Refundable fee:
Monthly payment = $ 1,408.92
Monthly interest = 0.6314%
APR = 7.58%
EAR = 7.85%

Nonrefundable fee:
APR = 7.50%
EAR = 7.76%
Chapter 4
Question 64

Input area:

Amount of loan $ 1,000

# of years 3
Interest rate 15%

Output area:

Total repayment = $ 1,520.87

Monthly payment = $ 42.25
Montyhly interest = 2.47%

APR = 29.63%
EAR = 34.00%

It's called add-on interest because the interest amount

of the loan is added to the principal amount of the loan
before the loan payments are calculated.
 Chapter 4
Question 65

Input area:

Annual withdrawal $ 90,000

# of years to withdraw 15
# of years until retirement 30
Interest rate 8%

Employer contribution $ 1,500

Trust fund distribution 25,000
Years until distribution 20

Output area:

a. Present value of withdrawals = $ 770,353.08

Annual deposit until retirement = $ 6,800.24

b. Present value in lump sum = $ 76,555.63

c. Future value of trust fund deposit = $ 53,973.12

Total annual deposit necessary = 6,323.80

Friend's annual deposit = $ 4,823.80

Chapter 4
Question 66

Input area:

Amount of debt $ 10,000

Interest rate on current card 19.2%
Interest rate on new card 9.2%
Planned monthly payment $ 200
Transfer fee 2%

Output area:

# of months to pay off current card = 101.39

# of months to pay of new card = 63.30
Difference = 38.10

Amount of bill with fees = $ 10,200

# of months with fees = 64.94
Chapter 4
Question 67

Input area:

Payout at retirement $ 250,000

# of years until retirement 65

Year Payment
1 $ 750
2 750
3 850
4 850
5 950
6 950

Interest rate 1 11%

# of years 6

Interest rate 2 7%
# of years 59

Output area:

Year Value at Year 6

1 $ 1,263.79
2 $ 1,138.55
3 $ 1,162.49
4 $ 1,047.29
5 $ 1,054.50
6 $ 950.00
Total value at year 6 $ 6,616.62

Total value at year 65 $ 358,326.50

The policy is not worth buying; the FV of

the policy is less than the payout at retirement.

We could also compare the PV of the two

cash flows. If we compare the PV:

Value of deposits $3,537.51

Value of payment from

insurance company $2,468.08
Either way, we still choose the same policy.
Chapter 4
Question 68

Input area:

Payment today $ 1,000,000

Payment every six months $ 500,000
# of payments 40
APR compounded daily 9%
Amount offered for winnings $ 10,000,000

Output area:

Effective six-month rate 4.54%

PV of payments in six months $ 9,151,418.61

Value of semi-annual payments today $ 8,754,175.76

Total value of winnings $ 9,754,175.76

You should take the offer.

Chapter 4
Question 69

Input area:

Annual payment $ 8,000

# of years 6

Annual payout $ 20,000

# of years 4

Output area:

Year Cash flow

1 $ (8,000)
2 $ (8,000)
3 $ (8,000)
4 $ (8,000)
5 $ (8,000)
6 $ (8,000)
7 $ 20,000
8 $ 20,000
9 $ 20,000
10 $ 20,000

Breakeven rate = 10.57%

Chapter 4
Question 70

Input area:

Plan X:
Annual payment $ 10,000
# of years In perpetuity

Plan Y:
Annual payout $ 22,000
# of years 10

Output area:

Discount rate needed = 6.25%

 Chapter 4
Question 71

Input area:

Annual payment $ 6,700

# of years In perpetuity
Interest rate 13%
Compunding periods 365
b. Payments begin in (yrs) 4

Output area:

a. EAR = 13.88%
Effective 2-year rate = 29.69%

Present value one year ago = $ 22,568.80

Present value today = $ 25,701.39

b. Present value = $ 17,402.51

Chapter 4
Question 72

Input area:

Present value of annuity = $C + $C + …+ $C

(1 + r) (1 + r)^2 (1 + r)^N

Present value of annuity due = $C + $C +…+ $C

(1 + r) (1 + r)^(N-1)

Present value of annuity due = (1 + r) $C + …+ $C

(1 + r) (1 + r)^N

= (1 + r) PVA

Future value of annuity = $C + $C(1 + r) + $C(1 + r) 2 + … + $C(1 + r)N-1

Future value of annuity due = $C(1 + r) + $C(1 + r) 2 + … + $C(1 + r)N

Future value of annuity due = (1 + r) ($C + $C(1 + r) + … + $C(1 + r) N-1)

= (1 + r) FVA
 Chapter 4
Question 73

Input area:

Weekly interest rate 10%

# of weeks 1
c. Loan proceeds $ 58.84
Loan payments $ 25.00

Output area:

a. APR 520.00%
EAR 14104.29%

b. APR 577.78%
EAR 23854.63%

c. Weekly interest 25.19%

APR 1309.92%
EAR 11851501.94%
Chapter 4
Question 75

Output area:

Interest rate 7.846894%

Time (0.00000)
Microsoft Excel 11.0 Answer Report
Worksheet: [Jaffe 8th edition Chapter 04.xls]#75
Report Created: 5/31/2006 3:25:47 PM

Target Cell (Value Of)

Cell Name Original Value Final Value
$D$9 Time (0.07254) (0.00000)

Adjustable Cells
Cell Name Original Value Final Value
$D$7 Interest rate 10.000000% 7.846894%

Constraints
NONE