1. A store offers two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a discount of 9% from the purchase price. Assume the product sells for $100.

a-1. Calculate the present value of the payments if you can borrow or lend funds at an interest rate of 4 percent. (PV of installment plan)

Which is a better deal?

• Installment plan
• Pay in full

b-1. Calculate the present value if the payments on the 4-year installment plan do not start for a full year. (PV of installment plan)

2. Your landscaping company can lease a truck for $8,800 a year (paid at year-end) for 5 years. It can instead buy the truck for $38,000. The truck will be valueless after 5 years. The interest rate your company can earn on its funds is 6%.

a. What is the present value of the cost of leasing?

• b. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately?

3. You take out a 25-year $190,000 mortgage loan with an APR of 6% and monthly payments. In 14 years you decide to sell your house and pay off the mortgage. What is the principal balance on the loan? (Principal balance of the loan)

4. The $16.5 million lottery payment that you have just won actually pays $1.1 million per year for 15 years. The interest rate is 9%.

a. If the first payment comes in 1 year, what is the present value of the winnings?

b. What is the present value if the first payment comes immediately?

5.You believe you will need to have saved $400,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal?

6. A couple thinking about retirement decide to put aside $3,500 each year in a savings plan that earns 9% interest. In 15 years they will receive a gift of $15,000 that also can be invested.

a. How much money will they have accumulated 30 years from now? (accumulated savings)

b. If their goal is to retire with $850,000 of savings, how much extra do they need to save every year? (additional annual savings needed)

7. A store will give you a 5.00% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. What is the implicit borrowing rate being paid by customers who choose to defer payment for the month? (What is the EAR %)

8. What is the value of a perpetuity that pays $100 every 3 months forever? The interest rate quoted on an APR basis is 5.2%

9. Youve borrowed $7,939.58 and agreed to pay back the loan with monthly payments of $280. Assume the interest rate is 9% stated as an APR.

a. How long will it take you to pay back the loan? (Number of months)

b. What is the effective annual rate on the loan? (EAR)

10. You invest $1,100 at a 12% annual interest rate, stated as an APR. Interest is compounded monthly. How much will you have in 1.5 years? In 2 years?

11. If a bank pays 6.5% interest with continuous compounding, what is the effective annual rate? (EAR%)

12. Consider the table given below to answer the first question (shares and market values in millions).

	Number of Shares					Stock Price				=		Market Capitalization
Callaway Golf (ELY)	93.8					$	8.76			=		$	821
Alaska Air Group (ALK)	124.7					$	80.77			=		$	10,074
Entergy (ETR)	178.5					$	75.92			=		$	13,551
Yum! Brands (YUM)	408.7					$	77.77			=		$	31,875
General Electric (GE)	9,331.0					$	30.34			=		$	283,091

a. The price of Entergy stock has risen to $90. What is the market value of the firms equity if the number of outstanding shares does not change? (Enter your answer in billions rounded to 3 decimal places.)

b. The rating agency has revised Catalytic Concepts bond rating to A (use Table 2.2). What interest rate, approximately, would the company now need to pay on its bonds? (Enter your answer as a percent rounded to 2 decimal places.)

c. A farmer and a meatpacker use the commodity markets to reduce their risk. One agrees to buy live cattle in the future at a fixed price, and the other agrees to sell. Which one sells?

• A farmer
• A meatpacker

b-1. Calculate the present value if the payments on the 4-year installment plan do not start for a full year.