Exam 4: Time Value of Money

Your uncle has $300,000 invested at 7.5%,and he now wants to retire.He wants to withdraw $35,000 at the end of each year,beginning at the end of this year.He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account.What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer,round down to the nearest whole number.)

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to open a new restaurant,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

You are hoping to buy a new boat 3 years from now,and you plan to save $4,200 per year,beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit,3 years from now?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months,assuming each month has 30 days?

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.