Q1
• The following expression matches the interest factor of
continuous compounding and m compounding.
• Plug r=0.2, m=4 to get x=0.205
Q2
• C: Two or more outcomes are possible
Q3
• Solve for C from the annuity formula
• Since the loan is amortized monthly, use effective monthly
interest rate and T=180
Q4
• First payment equals principal paid plus interest on total loan
amount:
Q5
• Last Payment is equal to last amount of principal left, which
since it was paid in equal parts is $2000, plus interest on what
principal is left.
Q6
• C: No, because there may be other constraints that prevent
the company from investing in this project
Q7
• Use future value formula with simple interest, plug in
PV=1000, r=0.07
Q8
• Discount the future flow of cash one at a time since the rate
of growth of payments is not constant, r=0.15
C1
500
C2
540
C3
580
C4
620
C5
660
Q9
• There are 14 months between those dates, or t=1.16 years.
Use compound interest future value formula, with m=6,
r=0.24, and PV=50,000:
Q10
• 18 months is equivalent to 0.66 years. In addition, there are 9
years in between the dates. Use compound interest future
value formula with t=9, m=0.66, r=0.24, PV=50,000:
Q11
• Find what the payments are for a 5 year amortization using
monthly compounding. Using this fixed payment, calculate
the PV at the end of year 1 for the remaining payments.
• For first part, use the formula below using re=0.06/12=0.005,
T=60, and PV=50,000:
• Then calculate FV at the end of year 1 for remaining
payments, using re=0.005, T=48, C=966.64:
Q12
• Solve for t in years from the compound interest future value
formula, then multiply t by 12 to get months.
•
For the formula below use FV=178, PV=100, r=0.12, m=12
• 4.82 years is approximately 58 months.
Q13
• The internal rate of return is the constant discount rate that
would make the investments NPV=0. You can find by solving
the following equation with x=(1-p) using the quadratic
equation:
• Take the positive value, for which IRR=p=x-1=0.36
Q14
• A) Use continuous compounding PV formula with stated
interest rate, so r=0.08, t=10, FV=1,200:
• B) Use PV formula with effective interest rate, so r=0.08, t=10,
FV=1,200: