TUTORIAL 4: QUESTIONS
TIME VALUE OF MONEY – PART II
CHAPTER 6
6–3. (Calculating the future value of an ordinary annuity) (Related to Finance for Life: Saving for
Retirement on page 204) At 25, Manoj Patel decided to leave his public sector job and start a furniture
business. The business has grown in two years, and Manoj is now planning for his retirement.
a. He wants to retire at 65 and has found a pension fund that returns 8 percent annually and is free
from any tax incidence. How much will Manoj have accumulated at the time of his retirement if he
starts investing 250,000 each year in this account starting immediately?
b. Now consider that Manoj wants to ensure that his business grows to its full potential and decides
to reinvest all the profits for the next three years before he starts saving for his pension. If his annual
saving amount remains the same, how much will he have accumulated in his pension fund at the time
of his retirement?
6–9. (Calculating annuity payments) Kelly Yeo plans to buy her own apartment in Singapore in 10
years’ time when she retires. She has identified a location where house prices average at $300,000 at
present. She also expects a rise in the house price by 5 percent every year. She plans to have the funds
to buy the apartment at the time of her retirement by depositing an equal amount of money every
year in a bank account that pays 9 percent per annum compound interest. How much does she need
to deposit every year in this account to reach her goal at the time of retirement?
6–12. (Calculating the future value of an annuity) Upon graduating from college 35 years ago, Dr. Nick
Riviera was already planning for his retirement. Since then, he has made $300 deposits into a
retirement fund on a quarterly basis. Nick has just completed his final payment and is at last ready to
retire. His retirement fund has earned 9 percent compounded quarterly.
a. How much has Nick accumulated in his retirement account?
b. In addition to this, 15 years ago Nick received an inheritance check for $20,000 from his beloved
uncle. He decided to deposit the entire amount into his retirement fund. What is his current balance
in the fund?
6–16. (Calculating an annuity’s interest rate) Your folks would like some advice from you. An insurance
agent just called and offered them the opportunity to purchase an annuity for $21,074.25 that will
pay them $3,000 per year for 20 years. They don’t have the slightest idea what return they would be
making on their investment of $21,074.25. What rate of return would they be earning?
6–21. (Calculating the number of annuity periods) Rajesh has just bought a large flat screen TV for €
4,000 on hire purchase. He has agreed to pay 16 percent per annum compounded monthly interest
on this amount. He has agreed to a monthly payment of €200. How long will he take to repay the loan?
How much will he pay in interest on this loan?
6–27. (Calculating components of annuity payments) Omar Khalid has started a new factory and
bought a commercial building for $160,000 with an 8 percent mortgage to be paid over 20 years,
calling for payment semi-annually. What will be the semi-annual payment? What will the interest and
principal components be in the first two installments of the first year?
6–60. (Analyzing a complex stream of cash flows) Roger Sterling has decided to buy an ad agency and
is going to finance the purchase with seller financing—that is, a loan from the current owners of the
agency. The loan will be for $2,000,000 financed at a 7 percent nominal annual interest rate. Sterling
will pay off the loan over five years with end-of-month payments along with a $500,000 lump-sum
payment at the end of Year 5. That is, the $2 million loan will be paid off with monthly payments, and
there will also be a final payment of $500,000 at the end of the final month. How much will the
monthly payments be?
