Homework Assignment #1

Chapter 1: Financial Planning Problems

#1 Calculating the Future Value of Property. Josh Collins plans to buy a house for $210,000. If that real estate is expected to increase in value by 3 percent each year, what will its approximate value be six years from now?

#2 Using the Rule of 72. Using the rule of 72, approximate the following amounts.

a. If the value of land in an area is increasing 6 percent a year, how long will it take for property values to double?

b. If you earn 10 percent on your investments, how long will it take for your money to double?

c. At an annual interest rate of 5 percent, how long will it take for your money to double?

#4 Computing Future Living Expenses. A family spends $46,000 a year for living expenses. If prices increase by 2 percent a year for the next three years, what amount will the family need for their living expenses after three years?

#6 Computing the Time Value of Money. Using a financial calculator or time value of money tables in the Chapter Appendix, calculate the following.

a. The future value of $450 six years from now at 7 percent.

b. The future value of $900 saved each year for 10 years at 8 percent.

c. The amount a person would have to deposit today (present value) at a 6 percent interest rate to have $1,000 five years from now.

Business 001

Fall 2020 Hoyul Paik

Homework Assignment #1

d. The amount a person would have to deposit today to be able to take out $600 a year for 10 years from an account earning 8 percent.

#7 Calculating the Future Value of a Series of Amounts. Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $80 for this service. Over a period of 10 years, how much does Elaine gain from preparing her own tax return? Assume she can earn 3 percent on her savings.

#9 Calculating the Present Value of a Series. Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $15,000 available each year for various school and living expenses. If he earns 4 percent on his money, how much must be deposited at the start of his studies to be able to withdraw $15,000 a year for three years?

#10 Using the Time Value of Money for Retirement Planning. Carla Lopez deposits $3,400 a year into her retirement account. If these funds have an average earning of 9 percent over the 40 years until her retirement, what will be the value of her retirement account?

#11 Calculating the Value of Reduced Spending. If a person spends$15 a week on coffee (assume $750 a year), what would be the future value amount over 10 years if the funds were deposited in an account earning 3 percent?

Chapter 2: Financial Planning Problems

#1 Determining the Future Value of Education. Jenny Lopez estimates that as a result of completing her master’s degree, she will earn an additional $8,000 a year for the next 40 years.

a. What would be the total amount of these additional earnings?

b. What would be the future value of these additional earnings based on an annual interest rate of 6%?

#3 Calculating Future Value of Salary. During a job interview, Pam Thompson is offered a salary of $32,000. The company gives annual raises of 4 percent. What would be Pam’s salary during her fifth year on the job?

#4 Computing Future Value. Calculate the future value of a retirement account in which you deposit $2,000 a year for 30 years with an annual interest rate of 5 percent.

#6 Comparing Employment Offers. Bill Mason is considering two job offers. Job 1 pays a salary of $36,500 with $4,500 of nontaxable employee benefits. Job 2 pays a salary of $34,700 and

$6,120 of nontaxable benefits. Which position would have the higher monetary value? Use a 28 percent tax rate.

#7 Calculating the After-Tax Value of Employee Benefits. Helen Ming receives a travel allowance of $180 each week from her company for time away from home. If this allowance is taxable and she has a 24 percent income tax rate, what amount will she have to pay in taxes for this employee benefit?

#8 Future Value of Advanced Training. Joshua Kelly estimates that taking some classes would result in earning $3,800 more a year for the next 30 years. Based on an annual interest rate of 4 percent, calculate the future value of these classes.

Chapter 3: Financial Planning Problems

#2 Calculating Balance Sheet Amounts. Based on the following data, compute the total assets, total liabilities, and net worth.

Liquid assets, $4,670 Household assets, $93,780 Investment assets, $26,910 Long-term liabilities, $76,230 Current liabilities, $2,670

#4 Computing Balance Sheet Amounts. For each of the following situations, compute the missing amount.

a. Assets $48,000; liabilities $12,800; net worth $ .

b. Assets $78,780; liabilities $ ; net worth $13,700.

c. Assets $44,280; liabilities $12,265; net worth $ .

d. Assets $ ; liabilities $38,374; net worth $53,795.

#5 Calculating Financial Ratios. The Fram family has liabilities of $128,000 and assets of

$340,000. What is their debt ratio? How do you assess this?

#6 Determining Financial Progress. Carl Lester has liquid assets of $2,680 and current liabilities of $2,436. What is his current ratio? What comments do you have about this financial position?

#8 Calculating the Effect of Inflation. Bill and Sally Kaplan have an annual spending plan that amounts to $39,500. If inflation is 3 percent a year for the next three years, what amount will the Kaplans need for their living expenses three years from now?

#10 Calculating Present Value of Savings Fund. Hal Thomas wants to establish a savings fund from which a community organization could draw $1,000 a year for 20 years. If the account earns 2 percent, what amount would he have to deposit now to achieve this goal?

Chapter 4: Financial Planning Problems

#1 Computing Taxable Income. Ross Martin arrived at the following tax information:

What amount would Ross report as taxable income?

#12 Comparing Taxes on Investments. Would you prefer a fully taxable investment earning 8.1 percent or a tax-exempt investment earning 6.1 percent? (Assume a 28 percent tax rate.) Why?