Use TVM techniques to problems involving loan payments and asset values Computes
ID: 2757725 • Letter: U
Question
Use TVM techniques to problems involving loan payments and asset values
Computes present and future values
1.
a.
You deposit $100 into an account earning a 10% annual rate of interest. How much money will you have in the account at the end of five years?
b.
You have just won the lottery and have a choice of receiving a lump sum of $1,000,000 or an annuity of $100,000 per year for 15 years. If the appropriate discount rate is 8%, which alternative would you choose? (10 points) Explain. (5 points)
c.
What happens to the future value of a sum of money deposited for N years as the rate of return k increases? (15 points) What happens to the present value of a sum of money to be received at the end of N years as k increases?
Explanation / Answer
a)
Future value = P×(1+r)^n
P is payment
r is interest rate per period
n is number of periods
= $100×(1+10%)^5
= $161.05
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