SOLUTIONS TO SELECTED PROBLEMS

Student: You should work the problem completely before referring to the solution.

CHAPTER 1

Solutions included for problems 1, 4, 7, 10, 13, 16, 19, 22, 25, 28, 31, 34, 37, 40,
43, 46, and 49

1.1 Time value of money means that there is a certain worth in having money and the worth changes as a function of time.

1.4 Nearest, tastiest, quickest, classiest, most scenic, etc

1.7 Minimum attractive rate of return is the lowest rate of return (interest rate) that companies or individuals consider to be high enough to induce them to invest their money.

1.10 Rate of increase = [(29 – 22)/22]*100 = 31.8%

1.13 Profit = 8 million*0.28 = $2,240,000

1.16 (a) Equivalent future amount = 10,000 + 10,000(0.08) = 10,000(1 + 0.08) = $10,800

(b) Equivalent past amount: P + 0.08P = 10,000 1.08P = 10,000 P = $9259.26

1.19 80,000 + 80,000(i) = 100,000 i = 25%

1.22 Simple: 1,000,000 = 500,000 + 500,000(i)(5) i = 20% per year simple

Compound: 1,000,000 = 500,000(1 + i)5 (1 + i)5 = 2.0000 (1 + i) = (2.0000)0.2 i = 14.87%

1.25 Plan 1: Interest paid each year = 400,000(0.10) = $40,000

Total paid = 40,000(3) + 400,000 = $520,000

Plan 2: Total due after 3 years = 400,000(1 + 0.10)3 = $532,400

Difference paid = 532,400 – 520,000 = $12,400

1.28 (a) FV(i%,n,A,P) finds the future value, F (b)