Washington-Atlantic invests $4 million

Washington-Atlantic invests $4 million to clear a tract of land and to set out some young pine trees. The trees will mature in 10 years, at which time Washington-Atlantic plans to sell the forest at an expected price of $8 million.

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WHAT IS WASHINGTON-ATLANTIC’S EXPECTED RATE OF RETURN?

A mortgage company offers to lend you $85,000; the loan calls for payments of $8,273.59 per year for 30 years.

WHAT INTEREST RATE IS THE MORTGAGE COMPANY CHARGING YOU?

To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $10,000 one year from today). Your rich uncle offers to put you through school, and he will deposit in a bank paying 7 percent interest, compounded annually, a sum of money that is sufficient to provide the 4 payments of $10,000 each. His deposit will be made today.
a.	HOW LARGE MUST THE DEPOSIT BE?
b.	HOW MUCH WILL BE IN THE ACCOUNT IMMEDIATELY AFTER YOU MAKE THE FIRST WITHDRAWAL?

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REACHING A FINANCIAL GOAL

You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year, with the first payment being made a year from today, in a bank, account that pays 12 percent interest, compounded annually. Your last deposit will be less than $1,250 if less is needed to round out to $10,000.

HOW MANY YEARS WILL IT TAKE YOU TO REACH YOUR $10,000 GOAL, AND HOW LARGE WILL THE LAST DEPOSIT BE?

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PRESENT VALUE OF A CASH FLOW STREAM

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Assume a discount rate of 10%.

WHICH OF THE THREE CONTRACTS OFFERS THE QUARTERBACK THE MOST VALUE?

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LOAN AMORTIZATION

Your company is planning to borrow $1,000,000 on a 5 year, 15% annual payment, fully amortized term loan.

WHAT FRACTION OF THE PAYMENT MADE AT THE END OF THE SECOND YEAR WILL REPRESENT REPAYMENT OF PRINCIPAL?

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NOMINAL COMPOUNDING

It is now January 1, 2003. You plan to make 5 deposits of $100 each, one every 6 months, with the first payment being made today.

IF THE BANK PAYS A NOMINAL INTEREST RATE OF 12 PERCENT, BUT USES SEMIANNUAL COMPOUNDING, HOW MUCH WILL BE IN YOUR ACCOUNT AFTER 10 YEARS?

Ten years from today you must make a payment of $1,432.02. To prepare for this payment, you will make 5 equal deposits, beginning today and for the next 4 quarters, in a bank that pays a nominal interest rate of 12 percent, quarterly compounding.

HOW LARGE MUST EACH OF THE 5 PAYMENTS BE?

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