Complete each of the following problems, and be sure to show your work with the

Question

Complete each of the following problems, and be sure to show your work with the appropriate formulation of the basic time value of money formula.

1. Connie Collateral accepted a $35,000 per year job from 2nd National Bank, but in doing so passed over a job with Community Lenders that started at $32,000 per year. Assuming that the difference in salary persists over the next twenty years, what is the cumulative difference in salary worth today using a 5% assumed rate of increase in salaries?

2. Irrigated farmland in Phillips County has been selling at $6,000 per acre. If this farmland is expected to increase in value at a compound rate of 3% per year, what will its value be in 20 years. (In this situation the interest rate is interpreted as a growth rate).

3. If the land in question 2 has been increasing at an annual rate of 5%, what was its price 10 years ago?

Explanation / Answer

1)

Difference in salaries = $35,000-$32,000 = $3,000

Present value of annuity = P×[1-(1÷(1+r)^n)]÷r

r is interest rate per period

P is payment per period

n is number of payments

= $3,000×[1-(1÷(1+5%)^20)]÷5%

Worth today = $37,386.63

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