ASSIGNMENT: TIME VALUE OF MONEY

Q1
a. The cash flows are a 31-year annuity where the first payment is received today. Remember to
use the after-tax cash flows
Ans: $1,201,180.55
b. This option pays $446,000, after-tax, immediately. The remaining money is received as a 30year annuity that pays $101,055, annually before tax. Find the PV of the annuity, on an after tax
basis using the appropriate discount rate.
Ans: PV Annuity + 446,000 = $1,131,898.53
Choose option 1.
Q2
Part (a)
This a numerical with two different annuities
One savings for retirement
One withdrawing during retirement
You need to withdraw money for 35 years after retirement (age 66-100). The amount to be
withdrawn every year is $100,000
Thus at end of age 65 you need $1,294,767 to be able to fund your entire retirement.
This amount is the future value for the annuity pertaining to your savings from age 31 65 (35
years). Solve for the constant stream to be saved for each of the 35 years (age 31 -65)
C = 7461.18
Let f be the % of salary saved each year. Thus 75000* f = 7461.18; f = 9.9482%
Part (b)
This is a two part annuity
Given the details of the g, r, t and the % savings from above, you will have $1,466,629 in your
account at the end of age 65.
With this as the PV of the annuity for your withdrawal phase, compute the C = $113,274
Thus the amount per month = $13,274
Part (c)
This is a two part annuity
Given the details of the g, r, t and the % savings from above, you will have $1,424,917 in your
account at the end of age 65. % savings = 9.9482%+1% = 10.9482%.
With this as the PV of the annuity for your withdrawal phase, compute the C = $110,052
Thus the amount per month = $10,052

Q3
Bank A: FV (at 3) = $ 11,250
Bank B: FV (at 3) = 11,260
Bank C: FV (at 3) = $ 11,270
Q4
r = 8.86% (also the IRR)
Q5
Determine the outstanding balance discount at the original rate 10% APR; O/S balance =
$154,286.22
a.
b.
c.
d.
e.

Calculate the loan payment on the new mortgage (C) at the new rate for 30 years
C = $987.93
Compute monthly payments if you need to payoff in 25 years C = $1,053.85
Compute N = 170 months
Find PV if you pay $1,402 on a monthly basis for 25 years at the new rate. Difference
between the computed amount and the O/s balance calculated above gives the additional
cash that can be borrowed = $50, 969 (may get slightly due to rounding)

Q6
Use growing annuity formula for salary
PV(salary) = $368,894.18
The yearly bonus are = 10% of his salary. Since her salary grows at 4%, bonus will grow by the
same
PV(Bonus) = $36,889.42
PV(Signing) = $10,000
PV(Offer) = PV(Salary) + PV(Bonus) + PV(Signing)
= $368,894.18 + $36,889.42 + $10,000
= $415,783.60