Problem Set: Annuities and Perpetuities

(Solutions Below)
1. If you plan to save $300 annually for 10 years and the
discount rate is 15%, what is the future value?
2. If you want to buy a boat in 6 years that costs $1,000 and
you can save $150 per year, what interest rate would you
need?
3. If you invest $1,000 per year in a stock portfolio with a
return of 8%, how much would you expect to have in 7
years?
4. How long would it take you to save $1,000 if you invested
$200 per year, and the interest rate is 10%?
5. If you need $10,000 to pay for your first year of graduate
school in 3 years and you get an interest rate of 9%, how
much must you invest each of the next three years?
6. If 6 years ago you invested $500 and received an interest
rate of 4% (compounded monthly), how much would you
now have?
7. You borrowed $100 from a friend, who said you need to
pay back $300 in 5 years, what rate are you being
charged if it is compounded weekly?
8. How many years would it take you to have $2,500 if you
saved $100 each month at 15%?
9. To have $6000 in 7 years what interest rate would you
need if you saved $200 every quarter?
10. If you win a lottery worth $1,000,000 payable in 15
years and the interest rate is 8% (compounded annually),
what is this worth today? Compounded quarterly?
Compounded monthly? Compounded weekly?
11. How long does it take for an investment to
quadruple in value if the investment yields 6% per year
(compounded monthly)?
12. What are the payments on a $40,000 loan repaid
monthly for six year (r = 7%)?
13. If I invest $100 today and every quarter for 3 years in
an account earning 11%, how much will I have at the end
of three years?
14. Suppose that I am trying to borrow money from you
to finance my business, and I promise to repay you $1,000
quarterly for two years. If your opportunity cost of funds is
10%, how much are you willing to lend me?
15. Jim makes a deposit of $120 every week (beginning
next week). The deposit is to earn interest annually at the
rate of 9 percent. How much will Jim have on deposit at
the end of seven years?
16. How long will it take to repay a loan of $150, if I pay
$1 per week and the rate on my loan is 4%?
17. Value an annuity of $300 per month for 7 years (r =
12.3%).
18. Suppose you have the opportunity to make an
investment expects to pay investors $7,000 per year for
next eight years. If the cost is $50,000, what return would
you receive?
19. If a two year weekly annuity is worth $5000 and r =
9.8%, what is the weekly cash flow?
20. Which grows to a larger future value, $1000 invested
for 2 years a) at 10 percent compounded weekly, or b) at
11 percent compounded semi-annually?
21. Value an annuity of $40 per year for ten years (r =
13%).
22. You want to save for your retirement in 50 years.
How much do you need to save from your biweekly
paycheck to have $5 million if you expect a return is 7%?
23. If an investment is expected to pay $400 per month
for the next 14 months, how much should you be willing to
pay for that asset if your cost of capital is 8%?
24. You have borrowed $35,000 at an interest rate of
9%. If you plan to pay the loan off in annual installments of
$4,000 (beginning next year), when can you pay back the
loan?
25. The type of house you would like to buy requires a
down-payment of $50,000. You plan to make that down-
payment six years from now. How much do you need to
save per week (beginning next week), if your money gets
7% (annually)?
26. You hope to go to graduate school, and the tuition
will be $50,000 for the one-year M.B.A. program. If you
can only afford to save $3,000/quarter and the interest
rate is 9%, how long will you need to save?
27. The house you plan to buy will require a down-
payment of $40,000 in two years. How much do you need
to save per month (beginning next month), if your savings
gets 8% (annually)?
28. You have borrowed $10,000 at an interest rate of
8.7%. If you plan to pay the loan off in quarterly
installments of $1,000 (beginning next quarter), how long
will it take you to pay back the loan?
29. Value a perpetuity of $400 per year (r = 14.9%).
30. If a perpetuity is worth $1,000 and r = 15.5%, what is
the cash flow?
Solutions
1. If you plan to save $300 annually for 10 years and the
discount rate is 15%, what is the future value?
P/Y = 1; N = 10; I/Y = 15; PV = 0; PMT = -300; FV = $6,091.12
2. If you want to buy a boat in 6 years that costs $1,000 and
you can save $150 per year, what interest rate would you
need?
P/Y = 1; N = 6; I/Y = 4.20%; PV = 0; PMT = -150; FV = 1,000
3. If you invest $1,000 per year in a stock portfolio with a
return of 8%, how much would you expect to have in 7
years?
P/Y = 1; N = 7; I/Y = 8; PV = 0; PMT = -1,000; FV = $8,922.80
4. How long would it take you to save $1,000 if you invested
$200 per year, and the interest rate is 10%?
P/Y = 1; N = 4.25 years; I/Y = 10; PV = 0; PMT = 200; FV = -
1,000
0.25 x 12 = 3 4 years, 3 months
NOTE: When the question involves time, you must convert
the answer to x years and y units.
5. If you need $10,000 to pay for your first year of graduate
school in 3 years and you get an interest rate of 9%, how
much must you invest each of the next three years?
P/Y = 1; N = 3; I/Y = 9; PV = 0; PMT = $3,050.55; FV = -10,000
6. If 6 years ago you invested $500 and received an interest
rate of 4% (compounded monthly), how much would you
now have?
P/Y = 12; N = 72 (= 6 x 12); I/Y = 4; PV = -500; PMT = 0; FV =
$635.37
7. You borrowed $100 from a friend, who said you need to
pay back $300 in 5 years, what rate are you being
charged if it is compounded weekly?
P/Y = 52; N = 260 (= 5 x 52); I/Y = 22.02%; PV = -100; PMT =
0; FV = 300
8. How many years would it take you to have $2,500 if you
saved $100 each month at 15%?
P/Y = 12; N = 21.89 months; I/Y = 15; PV = 0; PMT = -100; FV
= 2,500
21.89 22 months 1 year, 10 months
NOTE: Since N is periods, the time unit is the payment
period.
9. To have $6000 in 7 years what interest rate would you
need if you saved $200 every quarter?
P/Y = 4; N = 28 (= 7 x 4); I/Y = 2.02%; PV = 0; PMT = -200; FV
= 6,000
10. If you win a lottery worth $1,000,000 payable in 15
years and the interest rate is 8% (compounded annually),
what is this worth today? Compounded quarterly?
Compounded monthly? Compounded weekly?
P/Y = 1; N = 15; I/Y = 8; PV = $315,241.70; PMT = 0; FV = -
1,000,000
P/Y = 4; N = 60 (= 15 x 4); I/Y = 8; PV = $304,782.27; PMT = 0;
FV = -1,000,000
P/Y = 12; N = 180 (=15 x 12); I/Y = 8; PV = $302,396.05; PMT
= 0; FV = -1,000,000
P/Y = 52; N = 780 (= 15 x 52); I/Y = 8; PV = $301,472.08; PMT
= 0; FV = -1,000,000
11. How long does it take for an investment to
quadruple in value if the investment yields 6% per year
(compounded monthly)?
P/Y = 12; N = 277.95 months; I/Y = 6; PV = -1; PMT = 0; FV =
4
277.95 278 months 23 years, 2 months
12. What are the payments on a $40,000 loan repaid
monthly for six year (r = 7%)?
P/Y = 12; N = 72 (= 6 x 12); I/Y = 7; PV = -40,000; PMT =
$681.96; FV = 0
13. If I invest $100 today and every quarter for 3 years in
an account earning 11%, how much will I have at the end
of five years?
P/Y = 4; N = 12 (= 3 x 4); I/Y = 11; PV = 0; PMT = -100; FV =
$1,399.21
Value = 1,399.21 + $100 = $1,499.21
You add $100 to account for the first payment coming
now instead of one week from now.
14. Suppose that I am trying to borrow money from you
to finance my business, and I promise to repay you $1,000
quarterly for two years. If your opportunity cost of funds is
10%, how much are you willing to lend me?
P/Y = 4; N = 8 (= 2 x 4); I/Y = 10; PV = $7,170.14; PMT = -
1,000; FV = 0
15. Jim makes a deposit of $120 every week (beginning
next week). The deposit is to earn interest annually at the
rate of 9 percent. How much will Jim have on deposit at
the end of seven years?
P/Y = 52; N = 364 (= 7 x 52); I/Y = 9; PV = 0; PMT = -120; FV =
$60,776.79
16. How long will it take to repay a loan of $150, if I pay
$1 per week and the rate on my loan is 4%?
P/Y = 52; N = 159.44; I/Y = 4; PV = -150; PMT = 1; FV = 0
159.44 159 weeks 3 years, 3 weeks
17. Value an annuity of $300 per month for 7 years (r =
12.3%).
P/Y = 12; N = 84 (= 7 x 12); I/Y = 12.3; PV = $16,841.09; PMT
= -300; FV = 0
18. Suppose you have the opportunity to make an
investment expects to pay investors $7,000 per year for
next eight years. If the cost is $50,000, what return would
you receive?
P/Y = 1; N = 8; I/Y = 2.59%; PV = -50,000; PMT = 7,000; FV = 0
19. If a two year weekly annuity is worth $5000 and r =
9.8%, what is the weekly cash flow?
P/Y = 52; N = 104 (= 2 x 52); I/Y = 9.8; PV = -5,000; PMT =
$52.99; FV = 0
20. Which grows to a larger future value, $1000 invested
for 2 years a) at 10 percent compounded weekly, or b) at
11 percent compounded semi-annually?
P/Y = 52; N = 104 (= 2 x 52); I/Y = 10; PV = -1,000; PMT = 0;
FV = $1,221.17
P/Y = 2; N = 4 (= 2 x 2); I/Y = 11; PV = -1,000; PMT = 0; FV =
$1,238.82 (better)
21. Value an annuity of $40 per year for ten years (r =
13%).
P/Y = 1; N = 10; I/Y = 13; PV = $217.05; PMT = -40; FV = 0
22. You want to save for your retirement in 50 years.
How much do you need to save from your biweekly
paycheck to have $5 million if you expect a return is 7%?
P/Y = 26; N = 1300 (= 50 x 26); I/Y = 7; PV = 0; PMT =
$421.20; FV = -5,000,000
23. If an investment is expected to pay $400 per month
for the next 14 months, how much should you be willing to
pay for that asset if your cost of capital is 8%?
P/Y = 12; N = 14; I/Y = 8; PV = $5,329.68; PMT = -400; FV = 0
24. You have borrowed $35,000 at an interest rate of
9%. If you plan to pay the loan off in annual installments of
$4,000 (beginning next year), when can you pay back the
loan?
P/Y = 1; N = 17.97; I/Y = 9; PV = -35,000; PMT = 4,000; FV = 0
17.97 18 years
25. The type of house you would like to buy requires a
down-payment of $50,000. You plan to make that down-
payment six years from now. How much do you need to
save per week (beginning next week), if your money gets
7% (annually)?
P/Y = 52; N = 312 (= 6 x 52); I/Y = 7; PV = 0; PMT = $129.06;
FV = -50,000
26. You hope to go to graduate school, and the tuition
will be $50,000 for the one-year M.B.A. program. If you
can only afford to save $3,000/quarter and the interest
rate is 9%, how long will you need to save?
P/Y = 4; N = 14.31; I/Y = 9; PV = 0; PMT = 3,000; FV = -50,000
14.31 14 quarters 3 years, 2 quarters or 3 years, 6
months
27. The house you plan to buy will require a down-
payment of $40,000 in two years. How much do you need
to save per month (beginning next month), if your savings
gets 8% (annually)?
P/Y = 12; N = 24 (= 2 x 12); I/Y = 8; PV = 0; PMT = $1,542.42;
FV = -40,000
28. You have borrowed $10,000 at an interest rate of
8.7%. If you plan to pay the loan off in quarterly
installments of $1,000 (beginning next quarter), how long
will it take you to pay back the loan?
P/Y = 4; N = 11.40; I/Y = 8.7; PV = 10,000; PMT = -1,000; FV =
0
11.40 11 quarters 2 years, 3 quarters or 2 years, 9
months
29. Value a perpetuity of $400 per year (r = 14.9%).

400
0.149
C
Value
r
$2, 684. 56

30. If a perpetuity is worth $1,000 and r = 15.5%, what is
the cash flow?
1,000 0.155
C
Value C Value r
r
$155. 00