Question

Solve the following financial problems using the time value of money functions in Excel (PV, FV, PMT, NPER, RATE, EFFECT) OR using your financial calculator.

• Assume you deposit $3,000 today, and $300 at the end of each year, in an account earning 4% per year for 20 years. What is the future value?
• General Electric has an unfunded pension liability of $300 million that must be paid in 15 years. The CFO deposits $10 million in account today to help meet this goal, and will also deposit $8 million at the end of the next 15 years, to meet this liability. What annual rate of interest must the account earn to meet the liability?
• What is the present value of an ordinary annuity that promises $20,000 per year for 20 years if the appropriate discount rate is 5%?
• What is the present value of an annuity due that promises $20,000 per year for 20 years if the appropriate discount rate is 5%?
• What is the future value of an ordinary annuity that promises $60,000 per year for 10 years if the appropriate interest rate is 4%?
• What is the future value of an annuity due that promises $60,000 per year for 10 years if the appropriate interest rate is 4%?
• You recently received a credit card that quotes an annual percentage rate (APR) of 24%. The card requires monthly payments. What is the effective annual rate (EAR)?

PLEASE ANSWER THE QUESTIONS, DONT COPY AND PASTE

INCLUDE CALCULATIONS

Answer 1

Answer 1

Rate	4%
Present Value	3000
Pmt	300
Nper	20
Future Value	($15,506.79)

The formula for future value used here is FV(rate,nper,pmt,pv,type) Here type means that the payment is made in the begining or at the end of the period.

Present Value means the principle amount ie the amount deposited

Nper means the number of payments made till maturity

Rate means the rate of compounding

Answer 3:

Rate	5%
Nper	20
pmt	20000
P.V	($249,244.21)

Present Value of the annuity is $248244.21

Here the formula for Present value that is PV is used which is PV(RATE,NPER,PMT)

Answer 4:

Rate	4%
Nper	20
pmt	20000
Present Value	($261,706.42)

The present value of the annuity due is

The formula used here is of Present Value which is PV(RATE,NPER,PMT,FV,TYPE), in this case we have to make sure that in type we put the value as 1

Here :

Nper means the number of payments made till maturity

Rate means the rate of compounding

Type means when the payment is made either in the begining or at the end of each year

Answer 5:

Payment	60000
Rate	4%
nper	10
Future Value	$720366.43

The future value of the ordinary annuity will be $720366.43

The formula used here is FV(RATE,NPER,PMT,PV,TYPE)

where

Present Value means the principle amount ie the amount deposited

Nper means the number of payments made till maturity

Rate means the rate of compounding

Type means when the payment is made either in the begining or at the end of each year

The thing that is to be noted here is that in case of ordinary annuity we have to type 0 AND incase of deferred annuity we have to type 1

Answer 6

Payment	60000
rate	4%
nper	10
Future Value	$749,181.08

The future value of an annuity due is 749181.08

The formula used here is FV(RATE,NPER,PMT,PV,TYPE)

where

Present Value means the principle amount ie the amount deposited

Nper means the number of payments made till maturity

Rate means the rate of compounding

Type means when the payment is made either in the begining or at the end of each year

The thing that is to be noted here is that in case of ordinary annuity we have to type 0 AND incase of deferred annuity we have to type 1.

In this case it is a annuity due so in the TYPE part of the formula we have to enter the value as 1

Answer 7:

annual percentage rate (APR)	24%
Nper	12
effective annual rate (EAR)	26.82%

The formula used here is Effect(nominal rate,nper)

Where nominal rate is nothing but the APR and nper is 12 months since the APR is annual.

Hence  the effective annual rate (EAR) is 26.82%