Time value of money examples


Q no 13 ( ordinary annuity )
The Happy Hang Glide Company is purchasing a building and gas obtained a $190000 mortgage loan for 20 years. This loan bears a compound annual interest rate of 17 % and calls for equal annual installments payments at the end of each of the 20 year. What is the amount of the annual payment?
Solution:
P.V = $ 190000
No. of years = 20
Rate of interest = 17 %
We know that
P.V of annuity = P[ 1-(1+r)-n/r]
P = $33760

Q no 14: (Amortization)
Establish loan amortization schedule for the following loans to the nearest cent if a 36 month loan of $8000 with equal instalments payments at the end of each months. The interest rate is 1 % per month?
Solution:
No. of months = 36
P.V = $8000
r = 1 % per month
P.V of annuity = P[1-(1+r)-n/r]
P.V = $ 265.71
Months
Instalments
Interest
Principal
Balance
0
-
-
-
8000
1
265.7101
80
185.7101
7814.29
2
265.7101
78.1429
187.5672
7626.723
3
265.7101
76.26723
189.4429
7437.28
4
265.7101
74.3728
191.3373
7245.943
5
265.7101
72.45943
193.2507
7052.692
6
265.7101
70.52692
195.1832
6857.509
7
265.7101
68.57509
197.135
6660.374
8
265.7101
66.60374
199.1064
6461.267
9
265.7101
64.61267
201.0974
6260.17
10
265.7101
62.6017
203.1084
6057.061
11
265.7101
60.57061
205.1395
5851.922
12
265.7101
58.51922
207.1909
5644.731
13
265.7101
56.44731
209.2628
5435.468
14
265.7101
54.35468
211.3554
5224.113
15
265.7101
52.24113
213.469
5010.644
16
265.7101
50.10644
215.6037
4795.04
17
265.7101
47.9504
217.7597
4577.281
18
265.7101
45.77281
219.9373
4357.343
19
265.7101
43.57343
222.1367
4135.207
20
265.7101
41.35207
224.358
3910.849
21
265.7101
39.10849
226.6016
3684.247
22
265.7101
36.84247
228.8676
3455.379
23
265.7101
34.55379
231.1563
3224.223
24
265.7101
32.24223
233.4679
2990.755
25
265.7101
29.90755
235.8025
2754.953
26
265.7101
27.54953
238.1606
2516.792
27
265.7101
25.16792
240.5422
2276.25
28
265.7101
22.7625
242.9476
2033.302
29
265.7101
20.33302
245.3771
1787.925
30
265.7101
17.87925
247.8308
1540.094
31
265.7101
15.40094
250.3092
1289.785
32
265.7101
12.89785
252.8122
1036.973
33
265.7101
10.36973
255.3404
781.6325
34
265.7101
7.816325
257.8938
523.7388
35
265.7101
5.237388
260.4727
263.2661
36
265.7101
2.632661
263.0774
0.188612

Q no. 15:
You have borrowed $ 14300 at a compound annual interest rate of 15%. You feel that you will be able to make annual payments of $3000 per year on your loan. (Payments include both principal and interest.)How long will it be before the loan is entirely paid off(to the nearest year)?
Solution:
P.V = $14300
Rate of interest = 15%
Payments = $3000
P.V of annuity = P[1-(1+r)-n/r]
14300 = 3000[1-(1+0.15)-n/0.15]
n = 9 years
Q no. 16:
Lost Dutchman Mines, inc., is considering investing in Peru. It makes a bid to the government to participate in the development of a mine, the profit of which will be realized at the end of five years. The mine is expected to produce $ 500000 in cash to Lost Dutchman Mines at that time. Other than the bid at the outset, no other cash flows will occur, as the government will reimburse the company for all costs. If Lost Dutchman requires a nominal annual return of 20 %(ignoring any tax consequences) , what is the maximum bid it should make for the participation right of interest is compounded(a) annually ?(b) semi annually?(c)countinuously?
Solution:
(a)
 F.V = $500000
r = 20%  p.a
n = 5 years
 P.V = ?
P.V = F.V (1+r)-n
P.V = 500000(1+0.20)-5
P.V = $200938
(b) semi annually
P.V = F.V(1+r/m)-n*m100
P.V =500000(1+0.20/2)-5*2
P.V = $192771




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