Time Value of Money Questions

See attachment.

1.You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period.
1. How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity?
2. How much will you need today as a single amount to provide the fund calculated in part a if you earn only 9% per year during the 20 years preceding retirement? What effect would an increase in the rate you can earn both during and before retirement have on the values found in parts a and b? Explain
2.As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budget-that is, to make inflows equal outflows. You expect to be able to earn 8% on your investments during the next 5 years and wish to fund the budget shortfalls over the next 5 years with a single amount.

End of year Budget shortfall
1 $ 5,000
2 4,000
3 6,000
4 10,000
5 3,000
1. How large must the single deposit today into an account paying 8% annual interest be to provide for full coverage of the anticipated budget shortfalls?
2.  What effect would an increase in your earnings rate have on the amount calculated in part a? Explain.
3. Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments.
1. Calculate the annual, end-of-year loan payment.
1. Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments.
2. Explain why the interest portion of each payment declines with the passage of time
4. Tim Smith is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that
1. If he can come up with a down payment of $500, the dealer will finance the balance of the price at a 12% annual rate over 2 years (24 months). If Tim accepts the dealer's offer, what will his monthly (end-of-month) payment amount be?
2. Use a financial calculator to help you figure out what Tim's monthly payment would be if the dealer were willing to finance the balance of the car price at a 9% annual rate.
5. Define and specify the general equation for the value of any asset, Vo

Attached file(s):

questions 1-5.doc  View File