1460T_c06.qxd12/2/0509:28 am Page289 EQA Brief Exercises·289 6.Bill Jones is considering two investment options for a interest rate (to the nearest percent)was used to deter- $1,000 gift he received for graduation.Both investments mine the amount of the annuity?(Assume end-of-year have 8%annual interest rates.One offers quarterly com- payments.) pounding;the other compounds on a semiannual basis. 16.Greg Norman Enterprises leases property to Tiger Which investment should he choose?Why? Woods,Inc.Because Tiger Woods,Inc.is experiencing fi- 7.Brenda Starr deposited $18,000 in a money market cer- nancial difficulty,Norman agrees to receive five rents of tificate that provides interest of 10%compounded quar- $10,000 at the end of each year,with the rents deferred terly if the amount is maintained for 3 years.How much 3 years.What is the present value of the five rents dis- will Brenda Starr have at the end of 3 years? counted at 12%? 8.Charlie Brown will receive $50,000 on December 31,2012 17.Answer the following questions. (5 years from now)from a trust fund established by his (a)On May 1,2007,Liselotte Neumann Company sold father.Assuming the appropriate interest rate for dis- counting is 12%(compounded semiannually),what is some machinery to Tee-off Company on an install- ment contract basis.The contract required five equal the present value of this amount today? annual payments,with the first payment due on May 9.What are the primary characteristics of an annuity?Dif- 1,2007.What present value concept is appropriate ferentiate between an "ordinary annuity"and an "an- for this situation? nuity due." (b)On June 1,2007,Mike Brisky Inc.purchased a new 10.Linus,Inc.owes $30,000 to Peanuts Company.How machine that it does not have to pay for until May 1, much would Linus have to pay each year if the debt is 2009.The total payment on May 1,2009,will include retired through four equal payments(made at the end both principal and interest.Assuming interest at a of the year),given an interest rate on the debt of 12%? 12%rate,the cost of the machine would be the total (Round to two decimal places.) payment multiplied by what time value of money 11.The Forths are planning for a retirement home.They es- concept? timate they will need $160,000,4 years from now to pur- (c)Kelly Gibson Inc.wishes to know how much money chase this home.Assuming an interest rate of 10%,what it will have available in 5 years if five equal amounts amount must be deposited at the end of each of the 4 of $35,000 are invested,with the first amount in- years to fund the home price?(Round to two decimal vested immediately.What interest table is appropri- places.) ate for this situation? 12.Assume the same situation as in Question 11,except that (d)Patty Sheehan invests in a "jumbo"$200,000,3-year the four equal amounts are deposited at the beginning certificate of deposit at First Wisconsin Bank.What of the period rather than at the end.In this case,what table would be used to determine the amount accu- amount must be deposited at the beginning of each pe- mulated at the end of 3 years? riod?(Round to two decimals.) 18.Recently Vickie Maher was interested in purchasing a 13.Explain how the future value of an ordinary annuity Honda Acura.The salesperson indicated that the price interest table is converted to the future value of an an- of the car was either $27,000 cash or $6,900 at the end of nuity due interest table. each of 5 years.Compute the effective interest rate to the 14.Explain how the present value of an ordinary annuity nearest percent that Vickie would pay if she chooses to interest table is converted to the present value of an make the five annual payments. annuity due interest table. 19.Recently,property/casualty insurance companies have 15.In a book named Treasure,the reader has to figure out been criticized because they reserve for the total loss as where a 2.2 pound,24 kt gold horse has been buried. much as5 years before it may happen.The IRS has joined If the horse is found,a prize of $25,000 a year for the debate because they say the full reserve is unfair from 20 years is provided.The actual cost of the publisher to a taxation viewpoint.What do you believe is the IRS purchase an annuity to pay for the prize is $210,000.What position? BRIEF EXERCISES PLUS (L05) BE6-1 Steve Allen invested $10,000 today in a fund that earns 8%compounded annually.To what amount will the investment grow in 3 years?To what amount would the investment grow in 3 years if the fund earns 8%annual interest compounded semiannually? (L05) BE6-2 Itzak Perlman needs $20,000 in 4 years.What amount must he invest today if his investment earns 12%compounded annually?What amount must he invest if his investment earns 12%annual interest compounded quarterly?Brief Exercises • 289 6. Bill Jones is considering two investment options for a $1,000 gift he received for graduation. Both investments have 8% annual interest rates. One offers quarterly com￾pounding; the other compounds on a semiannual basis. Which investment should he choose? Why? 7. Brenda Starr deposited $18,000 in a money market cer￾tificate that provides interest of 10% compounded quar￾terly if the amount is maintained for 3 years. How much will Brenda Starr have at the end of 3 years? 8. Charlie Brown will receive $50,000 on December 31, 2012 (5 years from now) from a trust fund established by his father. Assuming the appropriate interest rate for dis￾counting is 12% (compounded semiannually), what is the present value of this amount today? 9. What are the primary characteristics of an annuity? Dif￾ferentiate between an “ordinary annuity” and an “an￾nuity due.” 10. Linus, Inc. owes $30,000 to Peanuts Company. How much would Linus have to pay each year if the debt is retired through four equal payments (made at the end of the year), given an interest rate on the debt of 12%? (Round to two decimal places.) 11. The Forths are planning for a retirement home. They es￾timate they will need $160,000, 4 years from now to pur￾chase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.) 12. Assume the same situation as in Question 11, except that the four equal amounts are deposited at the beginning of the period rather than at the end. In this case, what amount must be deposited at the beginning of each pe￾riod? (Round to two decimals.) 13. Explain how the future value of an ordinary annuity interest table is converted to the future value of an an￾nuity due interest table. 14. Explain how the present value of an ordinary annuity interest table is converted to the present value of an annuity due interest table. 15. In a book named Treasure, the reader has to figure out where a 2.2 pound, 24 kt gold horse has been buried. If the horse is found, a prize of $25,000 a year for 20 years is provided. The actual cost of the publisher to purchase an annuity to pay for the prize is $210,000. What interest rate (to the nearest percent) was used to deter￾mine the amount of the annuity? (Assume end-of-year payments.) 16. Greg Norman Enterprises leases property to Tiger Woods, Inc. Because Tiger Woods, Inc. is experiencing fi￾nancial difficulty, Norman agrees to receive five rents of $10,000 at the end of each year, with the rents deferred 3 years. What is the present value of the five rents dis￾counted at 12%? 17. Answer the following questions. (a) On May 1, 2007, Liselotte Neumann Company sold some machinery to Tee-off Company on an install￾ment contract basis. The contract required five equal annual payments, with the first payment due on May 1, 2007. What present value concept is appropriate for this situation? (b) On June 1, 2007, Mike Brisky Inc. purchased a new machine that it does not have to pay for until May 1, 2009. The total payment on May 1, 2009, will include both principal and interest. Assuming interest at a 12% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? (c) Kelly Gibson Inc. wishes to know how much money it will have available in 5 years if five equal amounts of $35,000 are invested, with the first amount in￾vested immediately. What interest table is appropri￾ate for this situation? (d) Patty Sheehan invests in a “jumbo” $200,000, 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accu￾mulated at the end of 3 years? 18. Recently Vickie Maher was interested in purchasing a Honda Acura. The salesperson indicated that the price of the car was either $27,000 cash or $6,900 at the end of each of 5 years. Compute the effective interest rate to the nearest percent that Vickie would pay if she chooses to make the five annual payments. 19. Recently, property/casualty insurance companies have been criticized because they reserve for the total loss as much as 5 years before it may happen. The IRS has joined the debate because they say the full reserve is unfair from a taxation viewpoint. What do you believe is the IRS position? BRIEF EXERCISES BE6-1 Steve Allen invested $10,000 today in a fund that earns 8% compounded annually. To what amount will the investment grow in 3 years? To what amount would the investment grow in 3 years if the fund earns 8% annual interest compounded semiannually? BE6-2 Itzak Perlman needs $20,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? What amount must he invest if his investment earns 12% annual interest compounded quarterly? (L0 5) (L0 5) 1460T_c06.qxd 12/2/05 09:28 am Page 289