Time Value of Money 1) A store offers two payment plans. Under the installment plan, you pay 20% down and 20% of the purchase price in each of the next 4 years. If you pay the entire bill immediately, you can take a 5% discount from the purchase price. | a. | Calculate the present value of the payments, if you can borrow or lend funds at a 7% interest rate. Assume the product sells for $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.) | Present value | $ | b. | Calculate the payment net of discount. | Payment net of discount | $ | c. | Which is a better deal? | | | | | Pay the entire bill immediately | | Installment plan | |

2) Home loans typically
*…show more content…*

What is the effective annual rate on a 1-year loan with an interest rate quoted on a discount basis of 22.25%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |

Effective annual rate | % |

5) You believe you will need to have saved $520,000 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |

Annual savings | $ |

6)

Your consulting firm will produce cash flows of $110,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 6.2%, and you anticipate inflation of about 2.2%. |

a. | What is the present value of your firm’s cash flows for years 1 through 6? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |

Present value | $ |

b. | How would your answer to (a) change if you anticipated no growth in cash flow? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |

Present value | $ |

7)

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Top of Form Good news: You will almost certainly be a millionaire by the time you retire in 40 years. Bad news:

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