WarmUp Exercises
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§E41 Assume a firm makes a $2,500 deposit into its money market account. If this account is currendy paying 0.7%, (yes, that's right, less than 1%!), what will the account balance be after 1 year?
E23S If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years?
(T3 E43 Gabrielle just won $2.5 million in the state lottery. She is given the option of • 3 j receiving a total of $1.3 million now or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a strict economic point of view which option should she take?
Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the savings shown in the following table over its 5year life:
2 50,000
3 45,000
4 25,000
5 15,000
Should the firm make this investment if it requires a minimum annual return of 9% on all investments?
§E45 Joseph is a friend of yours. He has plenty of money bur little financial sense. He received a gift of $12,000 for his recent graduation and is looking for 3 bank in which to deposit the funds. Partners' Savings Bank offers an account with an annual interest rate of 3% compounded semiannually, while Selwyn's offers an account with a 2.75% annual interest rate compounded continuously. Calculate the value of the two accounts at the end of one year and recommend to Joseph which account he should choose.
M 62282 Jack and Jill have just had their first child. If college is expected to cost $150,000 per Ifl year in IB years, how much should the couple begin depositing annually at the end of each year to accumulate enough funds to pay the first year's tuition at the beginning of the 19th year? Assume that they can earn a 6% annual rate of return on their investment.
VW_A/ Go to the book's companion website at www.pfeiihali.com/gltman to find a series of — Personal Finance WarmUp Exercises.
Problems A blue box (BS) indicates problems available in taii
P41 Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to result in cash inflows of $3,000 at the end of year 1, $6,000 at the end of years 2 and 3, $10,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6.
a. Draw and label a time line depicting the cash flows associated with Starbuck Industries' proposed investment.
b. Use arrows to demonstrate, on the time line in part a, how compounding to find future value can be used to measure all cash flows at the end of year 6.
c. Use arrows to demonstrate, on the time line in part b, how discounting to find present value can be used to measure all cash flows at time zero.
d. Which of the approaches—future value or present value—do financial managers rely on most often for decision making? Why?
Future value calculation Without referring to the preprogrammed function on your financial calculator or to tables, use the basic formula for future value along with the given interest rate, i, and the number of periods, n, to calculate the future value interest factor in each of the cases shown in the following table. Compare the calculated value to the value in Appendix Table Al.
,:Casc" lntcr«st ratc,i. "Number o£ periods,«
8kL'&Si Future value tables Use the future value interest factors in Appendix Table Al in each of the cases shown in the following table to estimate, to the nearest year, how long it would take an initial deposit, assuming no withdrawals, a. To double.
b. To quadruple.
ier' , ^ ^:.; JDnt^SHC1 ciji it'' jc ¿tic c:  V^ i
B 40
C 20
D 10
I sfliffiffiH Future values For each of the cases shown in the following table, calculate the future value of the single cash flow deposited today that will be available at the end of the deposit period if the interest is compounded annually at the rate specified over the given period.
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