Self-correction problems
Q-1:
The following cash-flow streams need to be analyzed
Cash flow End of year
stream
1 2 3 4 5
X $100 $200 $200 $300 $300
W 600 ------ ------ ------ ------
Y ----- ------ ------ ------ 1200
Z 200 ------ 500 ------ 300
Req # 1
Year 1 {W}
Data Data Data
PV=300 PV=300 PV=200
I=10% I=10% I=10%
N=0 N=01 N=02
FV5=? FV4=? FV3=?
Formula: Formula: Formula:
FV5=PV (1+i) n=n-t FV4=PV (1+i) n=n-t FV3=PV (1+i) n=n-t
FV5=300ans FV4=330ans FV3=242ans
Data Data
PV=300 PV=100
I=10% I=10%
N=3 N=4
FV2=? FV1=?
Formula: Formula:
FV2=PV (1+i) n=n-t FV1=PV (1+i) n=n-t
FV2=266.2ans FV1=146.41ans
Year 2 {X} Year 3 {Y}
Data Data
PV=600 PV=1200
I=10% I=10%
N=04 N=0
FV1=? FV5=?
Formula: Formula:
FV1=PV (1+i) n=n-t FV5=PV (1+i) n=n-t
FV1=878.46ans FV5=1200Ans
Year 4 {Z}
Data Data Data
PV=200 PV=500 PV=300
I=10% I=10% I=10%
N=04 N=02 N=0
FV1=? FV3. =? FV1=?
Formula: Formula: Formula:
FV1=PV (1+i) n=n-t FV3=PV (1+i) n=n-t FV5=PV (1+i) n=n-t
FV1=292.82 FV3=605.0 FV5=300
Individual Cash flow received
At the end Of year
Cash flow 1 2 3 4 5 Total future
stream value
W 146041 266.2 242 330 300 1284.61
X 878.86 - - - - 878.86
Y - - - - 1200 1200
Z 292.82 - 605 - 300 1197.82
Req#2
Present value of each cash flow and total present value of each stream (using Table II in the end-of-
book Appendix):
Year 1 {W}
FV
Formula: PV = n
( 1+ i )
Data Data Data Data Data
FV=100 FV=200 FV=200 FV=300 FV=300
I=14% I=14% I=14% I=14% I=14%
N=1 N=2 N=3 N=4 N=5
PV1=? PV2=? PV3=? PV4=? PV5=?
Formula : Formula : Formula : Formula : Formula :
FV FV FV FV FV
PV = n PV = n PV = n PV = n PV = n
( 1+ i ) ( 1+ i ) ( 1+ i ) ( 1+ i ) ( 1+ i )
PV1=87.71ans PV2=153.89ans PV3=134.99 PV4=177.62Ans PV5=155.81ans
Year 2{X} YEAR 3 {Y}
Data Data
FV=600 FV=1200
I=14% I=14%
N=1 N=5
PV1=? PV5=?
FV FV
Formula : PV = n Formula : PV = n
( 1+ i ) ( 1+ i )
PV1=526.31ans PV5=623.24ans
Year 4{Z}
Data Data Data
FV=200 FV=500 FV=300
I=14% I=14% I=14%
N=1 N=3 N=5
PV1=? PV3=? PV5=?
FV FV FV
Formula : PV = n Formula : PV = n Formula : PV = n
( 1+ i ) ( 1+ i ) ( 1+ i )
PV1=175.43ans PV3=337.48ans PV5=155.81ans
PV5 for individual cash received recorded
At the end of year
Cash-flow Total
stream present
1 2 3 4 5
value
W 87.71 153.89 134.99 177.62 155.81 710.02
X 523.31 - - - - 523.31
Y - - - - 623.24 623.24
Z 175.43 - 337.48 - 155.81 668.72
Q-2
Req#A Req#B
1st plan 2nd plan
Data: Data:
PMT=500(semi) PMT=1000
I=7%(semi) I=7.5%
N=10 N=10
FV=? FV=?
Formula: Formula:
FV=PMT [(1+i/m) n*m -1] FV=PMT [(1+i) n-1]
i/m i
FV=14138.571ans FV=14147.08ans
Req#C:
Plan 2 would be preferred by a slight margin –Rs 7.25
Req#D:
Data
PMT=1000
I=7%
N=10
FV=?
Formula: FV=PMT [(1+i) n-1]
FV=13816ans
Now plan 1 would be preferred by a non-trivial Rs 323.37 margin.
Q#3:
Interest rate indifferent b/w two contracts:
1ST CONTARCT 2ND CONTRACT
Data Data
N=6 N=12
FV=25000 FV=50000
I=? I=?
Formula: FV= (1+i) n
FV= (1+i) n
i=12.25%ans
Q#4
Req#A Req#B
Data Data
PMT=7000 PMT=7000
I=6% I=8%
N=20 N=20
PV=? PV=?
Formula: PV=PMT [1 - 1 ] Formula: PV=PMT [1 - 1 ]
[(1+i)n] [(1+i)n]
i i
PV=80290ans PV=68726ans
Q#5:
Req#A
What is the annual payment that will completely amortize the loan over four years? (You may wish to
round to the nearest dollar.)
Data
PV=10000
I=14%
N=4
PMT=?
Formula: PV=PMT [1 - 1 ]
[(1+i)n]
PMT=3432ans
Req#B
Of each equal payment, what is the amount of interest? The amount of loan principal?
Year installment interest Principle Total amount at year
ended
0 - 14% - 10000
1 3432 1400 2032 7968
2 3432 1115.5 2316.5 5651.5
3 3432 791 2641 3010.5
4 3432 421.5 3010.5 0
Q6
1st step 2nd step
Data Data
N=10% N=10%
N=2 N=20
FV=1000 PMT=476.19
PMT=? PV=?
Formula: FV=PMT [(1+i) n-1] Formula: FV=PMT [(1+i) n-1]
I I
PMT=476.190 PV=4054.28
Q7
PV=1000
I=7.06%
N=21/3
FV=?
Formula: FV=PV(1+ I ) n
m
FV= 10416.08
Q#8
Data
PMT=76923
N=5%
N=65
FV=?
Formula: FV=PMT [(1+i) n-1]
FV=35,136,888
Our “penny saver” would have been better off by ($35,136,888 − $5,000,000) = $30,136,888 – by
depositing the pennies saved each year into a savings account earning 5 percent compound annual
interest.
Q#9
Req#A
How much (in dollars) of the first year’s payment is principal?
PV=50000
N=10
I=8%
Annual installment=7451.47
P.A=?
Formula: PV*I
I=4000Ans
Formula: A.I-i
Principle amount=3451.47
Req#B
Total installment payments − total principal payments
$74,514.70 − $50,000
Total interest payment = $24,514.70ans
