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Time Value of Money (Examples). The sample problems are not in order of topic or difficulty. Part 1: Example 1 - PV. If you invest $15,000 for ten years, you receive $30,000. What is your annual return?. Example 2 - The Multi-Period Case.
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0 1 2 … 29 30 31 32 ...39
? 0 0 … 0 25K 25K 25K 25K 25K
Notice that the year 0 cash flow = CF0 = ?
The cash flows years 1 – 29 are 0
The cash flows years 30 – 39 are 25,000
Motown Autos (MA) Advertisement:
American Classic Cars! Finance Special! Sprite Conversion! Now Only $15,000! Just $1,000 Down, 0% interest, and 3-years to pay with easy monthly payments!
What is the true interest rate in this deal? You can use the additional info below:
Classic Car News has an almost identical car advertised for $9,000, but it needs $3,000 of work to match the condition of the car offered by MA.
Hint: don’t even think about doing this:
You are thinking of buying a new car. You bought your current car exactly 3 years ago for $25,000 and financed it at 7% APR for 60 months. You need to estimate how much you owe on the loan to make sure that you can pay it off when you sell the old car.
You have just landed a job and are going to start saving for a down-payment on a house. You want to save 20 percent of the purchase price and then borrow the rest from a bank.
You have an investment that pays 10 percent APR. Houses that you like and can afford currently cost $100,000. Real estate has been appreciating in price at 5 percent per year and you expect this trend to continue.
How much should you save every month in order to have a down payment saved five years from today?
Q3) You are offered a note which pays $1,000 in 15 months (or 456 days) for $850.
You have $850 in a bank which pays a 6.76649% nominal rate, with 365 daily compounding, which is a daily rate of 0.018538% and an EAR of 7.0%.
You plan to leave the money in the bank if you don’t buy the note.
The note is riskless.Should you buy it?