Finance cash for annuity payments by mikeholy

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									                                             HANDOUT 5.1
                                             FINANCE BU337

                                       PROBLEM SET
                              COMPOUND INTEREST AND ANNUITIES


COMPOUND INTEREST:

FV    The REW Company invests $10,000 in a project that earns 10% compound annually. Assuming the
      company allows the interest to compound, what is the investment value at the end of 5 years?
PV    The XYZ Company is evaluating an investment that will return $35,000 at the end of two years.
      Assuming the company wants to earn 24% compounded monthly, how much do they pay for the
      investment? (Note: 24% annual interest)
i     A company invested $10,000 in a project that would return $18,596 at the end of 10 years. What is the
      annual interest rate?
N     The ABC Company invests $10,000 in a project that has annual earnings of 12%. How many periods
      before it doubles?


ORDINARY ANNUITY: (future)

FV    Big D deposits $5,000 into a sinking fund at the end of each quarter for 3 years.
      The funds pays 16% annual interest compounded quarterly. Find the value at the end of 3 years.
       (Note: find quarterly periodic rate: 16/4=4%)
PMT   The ABC Company must establish a sinking fund to retire a $1,000,000 bond issue at the end of 10 years.
      Deposits are made at the end of each 6-month period. If the 12% annual interest is compounded semi-
      annually, what is the amount of each deposit?
i     To accumulate$420,000, the MAC Company want to deposit $10,000 at the end of each quarter for 7 years.
      What is annual interest rate compounded quarterly?
N     The XYZ Company wants to deposit $5,000 per month in a sinking fund that pays 24% annual interest
      compounded monthly. How many end of months deposits are necessary to accumulate $115,000?

ORDINARY ANNUITY: (present)

PV    FURROS Company purchased a machine that provides annual savings of $20,000 for the next 10 years. At
      an annual discount rate of 10% compute the present value of the savings.
PMT   LD Company is borrowing $125,000 for 5 years. The loan has a 5 year term with and of quarter payments.
      Assume a 16% annual interest rate with quarterly compounding. What is the quarterly payment?
i     The Atlas Coal Company is purchasing a new strip mine auger for $700,000 and expects end of year
      savings equal to $144,000 for 9 years. What annual interest rate is earned on this machine?
N     The BG Company wants to set up an annuity payment of $4,000 at the end of each quarter. If $45,000 is
      deposited and it pays 16% annual interest compounded quarterly, how many payments can be received
      from this annuity fund?


VARIABLE CASH FLOW:

      The ABC Company purchases a machine that saves the following end-of-year amounts. Assuming a
      discount rate of 10% does the Present Value of the cash flow exceed the original cost? (Can they get their
      money back?)


      1-$5,000        2-$7,000        3-$8,000         4-$10,000     original cost -$23,000

								
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