1. If you were given the choice of borrowing at an interest rate of 10% p.a.
simple interest, or 9.2% p.a. compounded monthly, which should you
choose? Why?
Eff 9.598% cf Eff 10% therefore take the cheaper rate
2. Your brother has a debt that he may repay by paying $5,000 now or
$10,000 in four years’ time. If the interest rate is 14% p.a. compounded
monthly, would you advise him to repay the debt now or in four years?
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Eff 14.934% FV $8725 cf FV $10,000 OR PV $5000 cf PV $ $5731 OR
IRR is 18.92 % therefore pay $5000 today
3. Your sister has just graduated from university and has begun employment
with an investment bank. She intends to retire in 30 years from now and
would like to be able to withdraw $30000 per year from her savings for a
period of 20 years after retirement. She expects to earn 9% annually on
her savings.
Assuming end of year cash flows, what equal annual amount must your
sister save during her 30 years of employment in order to be able to
withdraw the desired annual amount during the 20 years of retirement?
PV $273856 therefore $2009.10 payment for 30 years
4. An investor is earning $15,000 this year (payable at the end of the year)
but expects to be earning $60,000 next year (payable at the end of the
year).
a. What is the maximum amount that the investor can consume today if
the interest rate is 10 %? $63,223
b. If the investor decides to consume zero this year, how much could she
consume next year? $76,500