Show your work. Do not just write down the final answers. I suggest that you use formulas to solve the problems. If you want to use a financial calculator, you may want to use it to double check the answer.

For all problems, ignore taxes and transaction costs.

1. If you invest $50,000 into an account that earns 8 percent annual return, how much will you have in the account in 10 years?

2. If you owe $100,000 at the end of ten years, how much should your creditor accept in payment immediately if she could earn 9 percent annual return on her money?

3. At an interest rate of 10 percent annually, how long will it take for a sum to triple?

4. You have just invested $50,000 for your son (age one). The money will be used for your sons education 17 years from now. You estimate that you will need $150,000 for your sons education by the time the boy goes to school. What rate of return will you need to achieve this goal?

5. A company has an unfunded pension liability of $900 million that must be paid in 30 years. To assess the value of the firms stock, financial analysts want to discount this liability back to the present. If the relevant annual rate of return is 7.5 percent, what is the present value of this liability?

6. An investment is expected to provide the following cash flows. If the annual rate of return on the investment is 7 percent, what is the present value of these cash flows? The cash flows occur at the end of the year.

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Year Cash flow

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1 $2,000

2 3,000

3 5,000

4 8,000

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7. If you deposit the following amounts in an investment account that earns 9 percent annual return, how much will you have at the end of year 4? Assume that the deposits occur at the end of the year and the first deposit occurs at the end of the first year.

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Year Deposit

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1 $10,000

2 15,000

3 25,000

4 40,000

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