1. [Value of a mixed stream: Harte Systems, Inc.

, a maker of electronic surveillance

equipment, is considering selling to a well-known hardware chain the rights to market its
home security system.  The proposed deal calls for the hardware chain to pay Harte $30,000
and $25,000 at the end of years 1 and 2 to make annual year-end payments of $15,000 in
years 3 through 9.  A final payment to Harte of $10,000 would be due at the end of year 10.

a. Lay out the cash flows involved in the offer on a time line.

b. If Harte applies a required rate of return of 12% to them, what is the present value of
this series of payments?

c. A second company has offered Harte an immediate one-time payment of $100,000 for
the rights to market the home security system.  Which offer should harte accept?

2. You have decided to endow your favorite university with a scholarship. It is expected to cost
$ 6,000 per year to attend the university into perpetuity. You expect to give the university the
endowment in 10 years and will accumulate it by making equal annual (end-of-year) deposits
into an account. The rate of interest is expected to be 10% for all future time periods.

• How large must the endowment be?

• How much must you deposit at the end of each of the next 10 years to accumulate the
required amount?

3. Retirement home at Deer Trail Estates now costs $ 185,000. Inflation is expected to cause
this price to increase at 6% per year over the 20 years before G.L. Donovan retires. How
large an equal, annual, end-of-year deposit must be made each year into an account paying an
annual interest rate of 10% for Donovan to have the cash needed to purchases a home at
retirement?

4. Inflation, time value, and annual deposits While vacationing in Florida, John Kelley saw the
vacation home of his dreams. It was listed with a sale price of $200,000. The only catch is
that John is 40 years old and plans to continue working until he is 65. Still, he believes that
prices generally increase at the overall rate of inflation. John believes that he can earn 9%
annually after taxes on his investments. He is willing to invest a fixed amount at the end of
each of the next 25 years to fund the cash purchase of such a house (one that can be
purchased today for $200,000) when he retires. a. Inflation is expected to average 5% per
year for the next 25 years. What will John's dream house cost when he retires? b. How much
must John invest at the end of each of the next 25 years to have the cash purchase price of the
 house when he retires? c. If John invests at the beginning instead of at the end of each of the
next 25 years, how much must he invest each year?

5. You want to buy a new plasma television in 3 years, when you think prices will have gone
down to a more reasonable level. You anticipate that the television will cost you $2,500. If
you can invest your money at 8% compounded monthly, how much do you need to put aside
today?
FV: 2500 PMT: 0 I/Y: 8/12 N:3*12 PV: 1968.14

6. You found your dream house. It will cost you $175,000 and you will put down $35,000 as a
down payment. For the rest you get a 30 year 6.25% mortgage. What will be your monthly
mortgage payment (assume no early repayment)?

PV: 175000
-
35000
FV: 0
I/Y: 6.25/12
N: 30*12

PMT: 862

7. You want to buy a new car. The car you picked will cost you $32,000 and you decide to go
with the dealer’s financing offer of 5.9% compounded monthly for 60 months.
Unfortunately, you can only afford monthly loan payments of $300. However, the dealer
allows you to pay off the rest of the loan in a one time lump sum payment at the end of the
loan. How much do you have to pay to the dealer when the lump sum is due?

PMT: 300
FV:0
I/Y: 5.9/12
N: 60
PV: 15555
lump sum: (32000
-
15555)(1+.059/12)^60 = 22071.75

8. Your parents set up a trust for you that you will not have access to until your 30th birthday,
which is exactly 9 years from today. By prior arrangement, the trust will be worth exactly
$200,000 on your 30th birthday. You need cash today and are willing to sell the rights to
that trust today for a set amount. If the discount rate for such a cash flow is 12%, what is the
 maximum amount that someone should be willing to pay you today for the rights to the trust
on your 30th birthday?

200,000/(1.12)

= 72,122.00

9. Forever Insurance Company has offered to pay you $100 per year at the end of each year
forever. If the correct discount rate for such a cash flow is 13%, what the the amount that you
would be willing to pay Forever Insurance for this set of cash flows?
100/.13 = 769.23

10. graduating from college with a finance degree, you begin an ambitious plan to retire in 25
years. To build up your retirement fund, you will make quarterly payments into a mutual
fund that on average will pay 12% APR compounded quarterly. To get you started, a relative
gives you a graduation gift of $5,000. Once retired, you plan on moving your investment to a
money market fund that will pay 6% APR with monthly compounding. As a young retiree,
you believe you will live for 30 more years and will make monthly withdrawals of $10,000.
To meet your retirement needs, what quarterly payment should you make?

11. A leasing contract calls for an immediate payment of £100,000 and nine subsequent
£100,000 semiannual payments at six-month intervals. What is the PV of these payments if
the discount rateis 8 percent?

12. You are offered a note that pays £1,000 in 15 months (or 456 days) for £850. You have £850
in a
bank that pays a 6.76649% nominal rate, with 365 daily compounding. You plan to leave the
money
in the bank if you don’t buy the note. The note is riskless. Should you buy it?