# 1 TVM HW Essay

Time Value of Money Homework

1. Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years from today. What is the cost of this vacation in today’s dollars if the discount rate is 6%?

2. The tax rates are as shown. Your firm currently has taxable income of $79,000. How much additional tax will you owe if you increase your taxable income by $30,000?

Taxable Income

Tax Rate

$ 0 - 50,000

15%

50,001 - 75,000

25%

75,001 - 100,000

34%

100,001 - 335,000

39%

3. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two

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Year 1 Year 2 Year 3

$5,180 $9,600 $2,250

9. What is the future value of the following cash flows at the end of year 3 if the interest rate is 9%? The cash flows occur at the end of each year.

Year 1 Year 2 Year 3

$9,820 $0 $4,510

10. What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25%? The cash flows occur at the end of each year.

Year 1 Year 2 Year 3

$6,800 $2,100 $0

11. The Bluebird Company has a $10,000 liability it must pay three years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the next three years, starting one year from today. The account pays a 3% rate of return. How much does the Bluebird Company need to deposit today?

12. If the stated rate of interest is 12% and it is compounded monthly, what is the effective annual interest rate?

13. Aunt Clarisse has promised to leave you an perpetuity that will pay $60 next year and grow at an annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%. What is present value of this promise?

14. You would like to have enough money saved to receive a growing perpetuity, growing at…