Chapter 5 Study Guide Assignment & Assignment Notes
Study Guide Problems to Complete
 Definitional Questions: all but questions 9, 10, and 13.
 Conceptual Questions: all but 1 and 5.
 Problems: all but 1, 4, 16-18, 20-28, 31-32.
Notes: Financial Calculators
 In the tables in the study guide there will be a button that corresponds with each of
the 5 below variables (N, I/YR, PV, PMT, FV). If there is a number above a button,
you should enter the number into your calculator and then press the corresponding
button. After entering all of the numbers above the buttons you should press the
compute button (CPT) and then the one remaining button. This will calculate the
value corresponding with the one remaining button. In the below solutions press the
compute (CPT) button before the last button listed in the problem. Note that buttons
are underlined in the below solutions.
 N: Number of periods.
o Sometimes you will be given various values and be asked to calculate the number
of periods.
o Other times you will be given the number of periods and asked to calculate some
other value.
 I/YR: Interest rate per period (periodic interest rate)
o Sometimes you will be given various values and be asked to calculate the interest
rate.
o Other times you will be given the periodic interest rate and asked to calculate
some other value.
 PV: Present value.
o Sometimes you will be given various values and be asked to calculate the present
value.
o Other times you will be told that there is an initial cost/investment associated with
an asset and be asked to calculate some value other than present value. When this
is the case, you should enter the initial cost/investment as a negative number for
PV.
o Still other times you will be told that there is an initial lump sum payment
received (for example with a loan) and be asked to calculate some value other
than present value. When this is the case, you should enter the initial lump sum
payment received as a positive number for PV.
 PMT: Payment
o The periodic payment received (usually annual) associated with an investment
(e.g., a bond payment) or the periodic payment paid associated with a loan or
investment (e.g., a deposit in a savings account).
 When it is the periodic payment paid associated with a loan or investment, it
must be entered as a negative number.
o Sometimes you will be given various values and be asked to calculate the
payment.

o Other times you will be given the payment and asked to calculate some other
value.
FV: Future value
o Sometimes you will be given various values and be asked to calculate the FV.
o Other times you will be told that there is a final lump sum payment received at the
end of an assets life (or a target lump sum that one is trying to achieve in the final
period) and be asked to calculate some value other than future value. When this is
the case, you should enter the lump sum payment as a positive number for FV.
For example, if a bond pays $100 annually and then $1,000 in the last year, FV =
$1,000.
Notes - Other
 Periodic payment: a period that occurs every period (i.e., regularly) during the life of
the asset.
 Lump sum payment: A payment that occurs only once during the life of the asset.
Usually at time period zero (the start of the assets life) or the last period (the end of
the asset’s life).
 When there is annual compounding:
o N will always be the number of years, and
o I/YR will always be the annual interest rate.
 Where there is semi-annual, quarterly, or monthly compounding:
o N will be Years/2 (semi-annual compounding), Years/4 (quarterly compounding)
or Years/12 (monthly compounding), and
o I/YR will be annual-interest-rate/2 (semi-annual compounding), annual-interstrate/4 (quarterly compounding), or annual-interest-rate/12 (monthly
compounding).
Chapter 5 Study Guide Assisted Solutions
Definitional Questions
 You do not need to answer the following questions: 9, 10, 13.
 See the study guide for solutions.
Conceptual Questions
1) Do not do.
2) True.
a) This can be seen from equations 5.1 and 5.2.
i) 5.1: FVN = PV(1+I)N
(1) The future value of some amount of money invested is always greater than
the amount of money invested because the future value (FV) equals the
amount of money invested (PV) multiplied by (1+I)N.
ii) 5.2: PV = FVN / (1+I)N
(1) The present value of some amount to be received in the future is always
less than the amount to be received in the future because the present value
(PV) equals the amount to be received in the future (FVN) divided by
(1+I)N.
3) d
a) If the cash flows are extended over a long period, for example if they are received
in years 11-20 (extending the payment over a 20 year period) rather than in years
1-10 (a 10 year period), the present value will be lower. This can be seen from
equation 5.2.
b) The discount rate is the “I” used in equation to discount each cash flow. Since I
appears in the denominator of equation 5.2, a greater I will reduce the present
value.
4) c
a) As “I” increases in equation 5.2, the present value gets smaller. The large “I” gets
the closer to zero that the present value becomes.
5) Do not do.
Problems
1) Do not do.
2) Do.
a) The ending value (FV) when interest is compounded semi-annually is computed
in the following way:
i) PV: The PV is -1,000 because the asset/investment (savings certificate) has an
initial cost of $1,000. PV is entered as a negative number because it is an
outflow.
ii) PMT: PMT is 0 because there are no periodic payments received associated
with the asset (savings certificate). Rather, the asset only has one lump sum
payment at the end of year 6.
iii) N: With semi-annual compounding the number of periods N = (number of
years) x (periods per year) = 6 x 2 = 12.
iv) I/YR: With semi-annual compounding the periodic interest rate I/YR =
(annual rate) / (number of payments per year) = 8/2 = 4.
v) FV: FV, the amount you solve for using your calculator, is the implied final
lump-sum payment received at the end of the asset (the savings certificate)
given the numbers specified above.
(1) FV = 1,601.03
b) The ending value (FV) when interest is compounded annually is computed in the
following way:
i) PV: The PV is -1,000 because the asset/investment (savings certificate) has an
initial cost of $1,000. PV is entered as a negative number because it is an
outflow.
ii) PMT: PMT is 0 because there are no periodic payments received associated
with the asset (savings certificate). It just pays one lump sum at the end of
year 6.
iii) N: With annual compounding the number of periods, N, is the number of
years in the life of the asset, 12.
iv) I/YR: With annual compounding the periodic interest rate, I/YR, is just the
annual interest rate.
3)
4)
5)
6)
v) FV: FV, the amount you solve for using your calculator, is the final lump-sum
payment received at the end of the asset (the savings certificate) given the
numbers specified above.
(1) FV = $1,586.87
c) The differences in the end values (FVs) is $1,601.03 - $1,586.87 = $14.16.
Do.
a) PV: The PV is -500 because the asset/investment (the loan to the friend) has an
initial cost of $500. PV is entered as a negative number because it is an outflow.
b) PMT: PMT is 0 because there are no periodic payments received associated with
the asset. The friend only one makes one payment at the end of the second year.
c) FV: FV is $600 because it is the final lump-sum payment received from the
asset/investment (the loan to the friend). FV is entered as a positive because it is
an inflow.
d) N: N is 2 because the asset/investment (loan to the friend) has a life of 2 years.
e) I/YR: I/YR, the amount you solve for using your calculator, is the implied annual
interest rate on the asset/investment (the loan to the friend) given the numbers
specified above.
i) I/YR = 9.54%
Do not do.
Do.
a) PV: The PV is -20,000 because the asset/investment (brokerage account) has an
initial cost (initial deposit at time zero) of -$20,000. PV is entered as a negative
number because it is an outflow.
b) PMT: PMT is -7,500 because the asset/investment requires annual payments paid
of $7,500. PMT is entered as a negative number because it is an outflow.
c) FV: FV is $375,000 because it is the final lump-sum payment received from the
asset/investment (brokerage account). FV is entered as a positive because it is an
inflow.
d) I/YR: I/YR is 8 because the asset/investment has an annual interest rate of 8%.
e) N: N, the amount you solve for using your calculator, is the number of years
necessary to achieve a final value of $375,000 given the numbers specified above.
i) N = 18.4
Do.
a) Note: In this problem it does not matter what you enter for the PV so long as the
FV is twice as much.
b) PV: The PV is -1 because the asset/investment has an initial cost of $1. PV is
entered as a negative number because it is an outflow.
c) PMT: PMT is 0 because there are no periodic payments received (or paid)
associated with the asset.
d) FV: The FV is 2 because the asset/investment has a final lump-sum payment
received of $2 (twice the value of the initial cost). FV is entered as a positive
because it is an inflow.
e) N: N is 5 because the asset/investment has a life of 5 years.
f) I/YR: I/YR, the amount you solve for using your calculator, is the implied annual
interest rate on the asset/investment given the numbers specified above.
i) I/YR = 14.87%
7) Do.
a) PV: The PV is 0 because the asset/investment (savings account) has no initial cost
(there is no initial money in the account).
b) PMT: PMT is -1,000 because the asset/investment (savings account) requires an
annual payment paid of $1,000. PV is entered as a negative number because it is
an outflow.
c) N: N is 5 because the asset/investment (savings account) has a life of 5 years (the
account is held for 5 years).
d) I/YR: I/YR is 6 because the asset/investment (savings account) has an annual
interest rate of 6%.
e) FV: FV, the amount you solve for using your calculator, is the final lump-sum
payment you will receive from the asset/investment (the savings account) given
the numbers specified above. It is the amount you would have in the savings
account at the end of the last period of the asset (year 5) given the numbers
specified above.
i) FV = 5,637.09
8) Do.
a) Note: In this problem all payments are made at the beginning of the period, so you
must set your calculator to beginning mode. For a TI BA II Plus: 2nd BGN 2nd
SET CE/C
i) Remember to set it back to end mode at the end of the problem. For a TI BA II
Plus: 2nd BGN 2nd SET CE/C
b) PV: The PV is 0 because the asset/investment (savings account) has no initial cost
since there is no money initially in the account.
c) PMT: PMT is -1,000 because the asset/investment (savings account) requires
periodic (annual) payments paid of $1,000. PV is entered as a negative number
because it is an outflow.
d) N: N is 5 because the asset/investment (savings account) has a life of 5 years (the
account is held for 5 years).
e) I/YR: I/YR is 6 because the asset/investment (savings account) has an annual
interest rate of 6%.
f) FV: FV, the amount you solve for using your calculator, is the final lump-sum
payment you will receive from the asset/investment (the savings account) given
the numbers specified above. It is the amount you have in the savings account at
the end of the last period (year 5) given the numbers specified above.
i) FV = $5,975.32
9) Do.
a) Note: If you haven’t already, set your calculator back to end mode. For a TI BA II
Plus: 2nd BGN 2nd SET CE/C
b) PV: The PV is 0 because the asset/investment (savings account) has no initial cost
since there is no money initially in the account.
c) PMT: PMT is -500 because the asset/investment (savings account) requires
periodic (semi-annual) payments paid of $500. PV is entered as a negative
number because it is an outflow.
d) N: With semi-annual compounding the number of periods N = (number of years)
x (periods per year) = 5 x 2 = 10.
e) I/YR: With semi-annual compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 6 / 2 = 3.
f) FV: FV, the amount you solve for using your calculator, is the final lump-sum
payment you will receive from the asset/investment (the savings account) given
the numbers specified above. It is the amount you have in the savings account at
the end of the last period (year 5).
i) FV = $5,731.94
10) Do.
a) FV: FV is $1,000 because it is the final lump-sum payment received from the
asset/investment. FV is entered as a positive because it is an inflow.
b) PMT: PMT is 0 because there are no periodic payments associated with the
asset/investment.
c) N: N is 8 because the asset/investment has a life of 8 years.
d) I/YR: I/YR is 7 because the asset/investment has an annual interest rate of 7%.
e) PV: PV, the amount you solve for using your calculator, is the present value of
the $1,000. Your calculator gives a negative amount because it calculates the
initial cost that would have been required for an asset/investment that paid $1,000
at the end of 8 years if the interest rate were 7%.
i) Note: Anytime you solve for PV and get a negative number, just convert it to
a positive number to get the correct answer.
ii) PV = $582.01
11) Do.
a) Note: The present value of an asset is the value in today’s dollars of the asset. It
is the maximum amount one would be willing to pay for an asset. In this
problem, you must solve for the present value of the asset.
b) PMT: PMT is 800 because the asset/investment involves annual payments
received of $800. PMT is entered as a positive because it is an inflow.
c) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment.
d) N: N is 6 because the asset/investment has a life of 6 years.
e) I/YR: I/YR is 5 because the asset/investment has an annual interest rate of 5%.
f) PV: PV, the amount you solve for using your calculator, is the present value of
the $800 annual payments received given the numbers specified above. Your
calculator gives a negative amount because it calculates the initial cost that would
have been required for an asset/investment that paid $800 for 6 years if the
interest rate were 5%.
i) Note: Anytime you solve for PV using your calculator and you get a negative
number, just convert it to a positive number to get the correct answer.
ii) PV = $4,060.55
12) Do.
a) PV: The PV is 60,000 because the asset/investment (the loan) has an initial lump
sum payment received of $60,000. PV is entered as a positive number because it
is an inflow.
b) PMT: PMT is -7,047.55 because the asset/investment (the loan) requires annual
payments paid of $7,047.55. It is entered as a negative number because it is an
outflow.
c) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment (the loan).
d) N: N is 20 because the asset/investment (the loan) has a life of 20 years.
e) I/YR: I/YR, the amount you solve for in this problem is the implied annual
interest rate on the loan given the numbers specified above.
i) I/YR = 10.00%
13) Do.
a) FV: FV is 7,500 because it is the final lump-sum payment received from the
asset/investment (the amount in the savings account at the end of 5 years). FV is
entered as a positive because it is an inflow.
b) PV: The PV is 0 because the asset/investment (savings account) has no initial cost
(there is no initial money in the account).
c) N: With semi-annual compounding the number of periods N = (number of years)
x (periods per year) = 5 x 2 = 10.
d) I/YR: With semi-annual compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 6/2 = 3.
e) PMT: PMT, the amount you solve for in this problem, is the periodic (semiannual) payment paid (i.e., deposit) that is required to yield $7,500 in 5 years
given the numbers specified above. It is a negative number because it is an
outflow.
i) PMT = -654.23
14) Do.
a) Since the asset in this problem has periodic payments received which never end, it
is called a perpetuity. The equation for the present value of a perpetuity is given
in equation 5.6:
i) PV = payment / interest rate = PMT / I
ii)
= $100 / 0.12 = 833.33
15) Do.
a) Note: With uneven payments (cash flows) you must enter the payments directly
into cash flow register of your calculator.
b) For the TI BA II +:
i) “Begin by pressing 2nd QUIT to leave whatever operation you were in, then
press the CF key to open the cash flow register, then press 2nd CLR WORK
to clear the cash flow register, and then enter the cash flows.”
ii) Type in the cash flow in period zero (CF0 on the calculator), then press the
Enter key, then press the down arrow.
(1) CF0 = 0 in this problem.
iii) Type in the cash flow in period one (CO1 on the calculator), then press the
Enter key, then press the down arrow, then press the Enter key again when
you see FO1 displayed (if the same cash flow is repeated several times, you
can type in the number of times it is repeated before pressing the enter key
and this will save you the time of having to enter each of the cash-flows
separately), then press the down arrow key again.
(1) In this problem CO1 = 2,000
iv) Do this for each cash flow.
(1) In this problem CO2 = 2,000; CO3 = 2,000; CO4 = 3,000; CO5 = -4,000
v) When you are done with the cash flows then press the NPV key, then type in
the interest rate, then press the Enter key, then press the down arrow key, then
press the CPT key.
(1) In this problem the annual interest rate I/YR = 12%.
16) Do not do.
17) Do not do.
18) Do not do.
19) Do.
a) Note: In this problem you must first solve for the difference in the future values of
the two different assets (savings accounts). Then you must solve for the present
value of the difference in future value of the two accounts.
b) FV of account 1.
i) PV: The PV is 1,000 because the asset/investment (savings account) has an
initial cost (initial deposit at time 0) of $1,000. PV is entered as a negative
because it is an outflow.
ii) PMT: PMT is 0 because the asset/investment (savings account) no periodic
payments paid.
iii) N: N is 2 because the asset/investment (savings account) has a life of 2 years
(the account is held for 5 years).
iv) I/YR: I/YR is 16 because the asset/investment (savings account) has an annual
interest rate of 16%.
v) FV: FV, the amount you solve for using your calculator, is the final lump-sum
payment you will receive from the asset/investment (the savings account)
given the numbers specified above. It is the amount you would have in the
savings account at the end of the last period of the asset (year 2) given the
numbers specified above.
(1) FV = $1,345.60
c) FV of account 2.
i) PV: The PV is 1,000 because the asset/investment (savings account) has an
initial cost (initial deposit at time 0) of $1,000. PV is entered as a negative
because it is an outflow.
ii) PMT: PMT is 0 because the asset/investment (savings account) no periodic
payments paid.
iii) N: With quarterly compounding the number of periods N = (number of years)
x (periods per year) = 2 x 4 = 8.
iv) I/YR: With quarterly compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 16/4 = 4.
v) FV: FV, the amount you solve for using your calculator, is the final lump-sum
payment you will receive from the asset/investment (the savings account)
given the numbers specified above. It is the amount you would have in the
savings account at the end of the last period of the asset (year 2) given the
numbers specified above.
(1) FV = $1,368.57
d) Different in FV’s = $22.97.
e) Note: The last step of this problem is to solve for the present value of $22.97 to be
received in two years assuming quarterly interest payments of 4%.
i) FV: FV is $22.97 because it is the additional final lump-sum payment receive
by the second account.
ii) PMT: PMT is 0.
iii) N: With quarterly compounding the number of periods N = (number of years)
x (periods per year) = 2 x 4 = 8.
iv) I/YR: With quarterly compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 16/4 = 4.
v) PV: PV, the amount you solve for in this problem, is the amount you would
pay today (in year 0) to receive information about the second account that
enabled you to received an additional $22.97 in two years due to the quarterly
compounding.
(1) Note: Anytime you solve for PV and get a negative number, just convert it
to a positive number to get the correct answer.
(2) PV = $16.78
20) Do not do.
21) Do not do.
22) Do not do.
23) Do not do.
24) Do not do.
25) Do not do.
26) Do not do.
27) Do not do.
28) Do not do.
29) Do.
a) Follow the instructions in the above solution to problem 15 for calculating the
present values of each of the four contracts. You must enter each of the different
cash flow streams into the cash flow register on your calculator to calculate each
of the four present values (NPVs). The present values are:
i) Contract 1: $4,556,024.02
ii) Contract 2: $5,101,003.65
iii) Contract 3: $4,197,246.10
30) Do.
a) Note: You should set this problem up similarly to the way you set up problem
number 12. The main difference is that there is monthly compounding in this
problem.
b) PV: The PV is 200,000 because the asset/investment (the loan) has an initial lump
sum payment received of $200,000. PV is entered as a positive number because it
is an inflow.
c) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment (the loan).
d) N: With monthly compounding the number of periods N = (number of years) x
(periods per year) = 30 x 12 = 360.
e) I/YR: With monthly compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 7.5/12 = 0.625.
f) PMT: PMT, the amount you solve for in this problem, is the required annual
payment paid to pay off the loan in 30 years. It is a negative value because it is an
outflow.
i) PMT = -1,398.43
31) Do not do.
32) Do not do.
33) Do.
a) Note:
i) Ignore the 200,000 figure in this problem as it should not have been included
in the problem.
ii) You should set this problem similarly to the way you set up problem number
30. The main difference is that you will solve for the amount of the loan (PV)
rather than the monthly payments (PMT).
b) PMT: PMT is -1,800 because the asset/investment (the loan) requires annual
payments paid of $1,800. It is entered as a negative number because it is an
outflow.
c) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment (the loan).
d) N: With monthly compounding the number of periods N = (number of years) x
(periods per year) = 30 x 12 = 360.
e) I/YR: With monthly compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 7.5/12 = 0.625.
f) PV: PV, the amount you solve for using your calculator, is the present value of
the loan payments given the numbers specified above. It is the loan amount that
could be paid off in 30 years. It is a positive amount because it is an inflow.
i) PV = $257,431.73
34) Do
a) PV: The PV is -15,000 because the asset/investment (savings account) has an
initial cost (initial deposit at time 0) of $15,000. PV is entered as a negative
number because it is an outflow.
b) PMT: PMT is -7,500 because the asset/investment (savings account) involves
annual payments paid of $7,500. PMT is entered as a negative number because it
is an outflow.
c) FV: FV is $1,000,000 because it is the final lump-sum payment received from the
asset/investment (savings account). FV is entered as a positive because it is an
inflow.
d) I/YR: I/YR is 6 because the asset/investment (bank account) has an annual
interest rate of 6%.
e) N: N, the amount you solve for using your calculator, is the number of years
necessary to achieve a final value of $1,000,000 given the numbers specified
above.
i) N = 35.76
35) Do.
a) Note: You should set this problem up identically to the way that you set up
problem number 34 except that you should use I/YR = 7%.
i) N = 32.58
36) Do
a) PV: The PV is -15,000 because the asset/investment (savings account) has an
initial cost (initial deposit at time 0) of $15,000. PV is entered as a negative
number because it is an outflow.
b) FV: FV is $1,000,000 because it is the final lump-sum payment received from the
asset/investment (savings account). FV is entered as a positive because it is an
inflow.
c) I/YR: I/YR is 7 because the asset/investment (bank account) has an annual
interest rate of 7%.
d) N: N is 35.76 because the asset/investment (savings account) has a life of 35.76
years (the account is held for 35.76 years). We assume N = 35.76 because we are
solving for the periodic (annual) payment that has to be paid to obtain a future
value of $1,000,000 in 35.76 years.
e) PMT: PMT, the amount you solve for in this problem, is the periodic (annual)
payment paid (i.e., deposit) that is required to yield $1,000,000 in 35.76 years
given the numbers specified above. It is a negative number because it is an
outflow.
i) PMT = -5,683.44
37) See the solution in the study guide.
a) Note: In this problem you must compare the present value (PV) of three different
payment schemes.
b) The present value (PV) of the first payment scheme is just the lump sum payment
of $46 million since it is received today (at time zero) and hence no discounting is
necessary. (Money received in the future must be divided-by, or discounted, by
the interest rate to the exponent the-number-of-periods-in-the-future.)
c) The present value (PV) of the second payment scheme – 10 annual end-of-year
payments of $7 million – is as follows:
i) PMT: PMT is 7 million because the asset/investment involves annual
payments received of $7 million. PMT is entered as a positive because it is an
inflow.
ii) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment.
iii) N: N is 10 because the asset/investment has a life of 10 years.
iv) I/YR: I/YR is 7 because the asset/investment has an annual interest rate of 7%.
v) PV: PV, the amount you solve for using your calculator, is the present value
of the $7 million annual payments received given the numbers specified
above. Your calculator gives a negative amount because it calculates the
initial cost that would have been required for an asset/investment that paid $7
million for 10 years if the interest rate were 7%.
(1) Note: Anytime you solve for PV using your calculator and you get a
negative number, just convert it to a positive number to get the correct
answer.
(2) PV = $49,165,071
d) The present value (PV) of the third payment scheme – 30 annual end-of-year
payments of $4 million – is as follows:
i) PMT: PMT is 4 million because the asset/investment involves periodic
payments received of $4 million. PMT is entered as a positive because it is an
inflow.
ii) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment.
iii) N: N is 30 because the asset/investment has a life of 30 years.
iv) I/YR: I/YR is 7 because the asset/investment has an annual interest rate of 7%.
v) PV: PV, the amount you solve for using your calculator, is the present value
of the $4 million annual payments received given the numbers specified
above. Your calculator gives a negative amount because it calculates the
initial cost that would have been required for an asset/investment that paid $4
million for 30 years if the interest rate were 7%.
(1) Note: Anytime you solve for PV using your calculator and you get a
negative number, just convert it to a positive number to get the correct
answer.
(2) PV = $49,636,165
38) See the solution in the study guide.
a) Note: You should set this problem up identically to the way that you set up
problem number 37 except that you should use I/YR = 8%.
39) See the solution in the study guide.
a) Note: You should set this problem up identically to the way that you set up
problem number 37 except that you should use I/YR = 9%.
40) Do.
a) Note: You should set this problem up similarly to the way that you set up problem
number 33.
b) PMT: PMT is -425 because the asset/investment (the loan) requires annual
payments paid of $425. It is entered as a negative number because it is an
outflow.
c) FV: FV is 0 because there is no final lump-sum payment associated with the
asset/investment (the loan).
d) N: With monthly compounding the number of periods N = (number of years) x
(periods per year) = 4 x 12 = 48.
e) I/YR: With monthly compounding the periodic rate I/YR = (annual rate) /
(number of payments per year) = 10/12 = 0.8333.
f) PV: PV, the amount you solve for using your calculator, is the present value of
the loan payments given the numbers specified above. It is the loan amount that
could be paid off in 4 years. It is a positive amount because it is an inflow.
i) PV = $16,756.97
g) The total value of the car that can be afforded is the value of the loan that can be
afforded ($16,756.97) plus the value of the down payment that can be afforded
($5,000)
i) Total value of car that can be afforded = 16,756.97 + 5,000 = $21,756.97
41) Do.
a) Note: You should set this problem up identically to the way that you set up
problem number 40 except that you should use N = (number of years) x (periods
per year) = 5 x 12 = 60.
i) PV = 20,002.78
b) The total value of the car that can be afforded is the value of the loan that can be
afforded ($20,002.78) plus the value of the down payment that can be afforded
($5,000)
i) Total value of car that can be afforded = 20,002.78 + 5,000 = $25,002.78