4 present value interest factor B u s i n e s s F i n a n c e

4 present value interest factor B u s i n e s s F i n a n c e

Answer the 5 questions below:

1. Your supervisor has tasked you with evaluating several loans related to a new expansion project. Using the PVIFA table (below), determine the annual payment on a $400,000, 8% business loan from a commercial bank that is to be amortized over a five-year period. Show your work. Does this payment seem reasonable? Explain.

TABLE 9.4 Present Value Interest Factor (PVIFA) for a $1 Ordinary Annuity
Year 5% 6% 7% 8% 9% 10%
 1 0.952 0.943 0.935 0.926 0.917 0.909
 2 1.859 1.833 1.808 1.783 1.759 1.736
 3 2.273 2.673 2.624 2.577 2.531 2.487
 4 3.546 3.465 3.387 3.312 3.240 3.170
 5 4.329 4.212 4.100 3.993 3.890 3.791
 6 5.076 4.917 4.767 4.623 4.486 4.355
 7 5.786 5.582 5.389 5.206 5.033 4.868
 8 6.463 6.210 5.971 5.747 5.535 5.335
 9 7.108 6.802 6.515 6.247 5.995 5.759
10 7.722 7.360 7.024 6.710 6.418 6.145

2. Dan is considering borrowing $500,000 to purchase a new condo. Based on that information, answer the following questions. Show all work.

  • Calculate the monthly payment needed to amortize an 8% fixed-rate 30-year mortgage loan.
  • Calculate the monthly amortization payment if the loan in (a.) was for 15 years instead.
  • In a few sentences, explain the effect of a smaller loan period. How does it influence the monthly payment and interest?

3. Use a financial calculator or computer software program to answer the following questions:

  • Melanie is trying to save money for retirement and has a future goal of $600,000 at the end of 20 years. Determine the present value of her goal using a discount rate of 11%.
  • How would the present value change if the $600,000 is to be received at the end of 15 years instead? Explain the impact and show your work?

4. Your friend Anne is planning to invest $400 each year for four years and will earn a rate of 6 percent per year.

  • Determine the future value of this annuity due if her first $400 is invested now. Show your work.
  • What is the difference between an annuity due and an ordinary annuity? Explain.

5. Jimmy has a bond with a $1,000 face value and a coupon rate of 9.5% paid semiannually. It has a five-year life.

  • If investors are willing to accept a 14 percent rate of return on bonds of similar quality, what is the present value or worth of this bond? Show your work.
  • What is the impact of paying interest semi-annually rather than annually? Explain.