PRACTICE QUESTIONS - TVM

Q1. The Brown's have a new born daughter and have decided to start saving for her college
education. They estimate she will attend school for 4 years and her schooling will cost $30;
000 per year. They will deposit a fixed amount of money into a savings account at the end of
each year for 18 years. The $30; 000 will come due at the end of each of the 19th, 20th,
21st, and 22nd years. They estimate that they will be able to invest at a nominal interest
rate of 4% compounded annually during the entire 22 years. How much money will they
need to deposit at the end of each year for the first 18 years?

Q2. John and Jill have $20,000 cash for the down payment of a house and they can afford a
15-year mortgage payment of $2,500/month. If the best mortgage rate that they can get is
7.5% then what will be the most affordable home that they can buy by their current budget
plan?

Q3. You plan to retire 33 years from now. You expect that you will live 27 years after
retiring. You want to have enough money upon reaching retirement age to withdraw
$180,000 from the account at the beginning of each year you expect to live, and yet still
have $2,500,000 left in the account at the time of your expected death (60 years from now).
You plan to accumulate the retirement fund by making equal annual deposits at the end of
each year for the next 33 years. You expect that you will be able to earn 12% per year on
your deposits. However, you only expect to earn 6% per year on your investment after you
retire since you will choose to place the money in less risky investments. What equal annual
deposits must you make each year to reach your retirement goal?

Q4. You have been hired as a financial advisor to Michael Jordan. He has received two offers
for playing professional basketball and wants to select the best offer, based on
considerations of money only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a
$11m offer of $1m a year for four years and $7m in year 5. What is your advice?

Q5. Bryan takes out a home loan worth $250,000 today. He will repay the loan by making
equal payments at the end of each month for the next 30 years. The interest is 6.0% APR
compounded monthly. Exactly 10 years after Bryan took out his home loan, he strikes it rich.
First thing he wants to do is pay off the remaining balance on his home loan. How much will
he need to pay?