FIN 331 San Diego State University Time Value of Money Questions Homework #1 will help you build and develop your understanding of Time Value of Money (Les

FIN 331 San Diego State University Time Value of Money Questions Homework #1 will help you build and develop your understanding of Time Value of Money (Lesson 5/ Chapter 14). I have completed the basics in the first half of the last class and hope to complete the entire chapter in our next class. This homework will be of huge value from the perspective of Test #2, so please make sure you understand and remember all the steps for the different problems. Students find it very easy when I solve the problems in class or when they review the power point slides. It is an entirely different story when you are attempting similar problems in the test. The first few questions can be easily answered based upon the material we have already covered in class. Loan mechanics, IRR & NPV, we shall cover in the next class. Wish you all the best and I encourage you to utilize the office hours if you need help. FIN 331: Real Estate Principles
Spring 2020
Time Value of Money
Homework #1
Short answer questions (2 points each)
Due Date: March 11, 2020
To be uploaded on Blackboard before class begins
Name _____________________________________
1. All compound interest equations consist of what four variables? To solve for one variable, how many
others must we know?
2. Explain the difference between a regular annuity and an annuity due.
3. If the required rate increases, does the present value increase or decrease (assuming all else remains
the same)?
4. Assuming the same interest rate, amount borrowed, and amortization period, which compounding
(payment) period – monthly or annually – would result in less interest being paid by the borrower?
Why?
Problems (4 or 5 points each)
1. The value of a house is estimated to be $89,000 today. If it has increased in value by 8 percent per year
for the last 10 years, what was the value 10 years ago? If the house had increased in value by 55
percent over the total 10-year period, what was the annual percentage increase? (4 points)
2. Doctor Bob purchased 100 acres of land 10 years ago for $10,000 per acre. If he could have alternately
invested the money at 9 percent per year, what price per acre must he receive today to break even
with his opportunity (required) rate? (4 points)
3. If Doctor Bob (in Problem 2) sold the land at $15,500 per acre today, what was his actual rate of
return? (4 points)
4. You want to purchase a house that is priced at $300,000. You can get a loan for 80 percent of the
bank’s appraised value at 5.25% for 30 years with monthly amortization. The bank’s appraiser has a
theory that the value of a house is 95% of the asking price and appraises it accordingly. What will be
your monthly payment if you take the loan? (5 points)
Page 2 of 4
5. Set up an amortization schedule for years 1 through 5 for Problem 4 showing annual mortgage
payment amounts, yearly mortgage balances, principal, and interest for each year (total). (Do not do a
monthly amortization schedule to answer this problem, but do assume monthly compounding. Hint:
Multiply the monthly payment in Problem 4 times 12 to get total annual payments) (5 points)
Year
Yearly Payment
Yearly Principal
Yearly Interest
Beginning Balance
Ending Balance
One
Two
Three
Four
Five
6. Suppose that your required rate of return on a condo is 12 percent. You are shown one such property
which has an asking price of $150,000. The sales representative shows you the following cash flow
projections for a holding period of 6 years:
Year (N)
Cash flow
1
$22,500
2
25,000
3
30,000
4
15,000
5
40,000
6
100,000
Should you buy the investment? Hint: use NPV and/or IRR to make the decision (4 points)
7. What would be your expected rate of return (like an IRR but for projections) in problem 6? (4 points)
Page 3 of 4
8. What is the net present value (NPV) of the duplex investment in Problem 6 if the asking price is
$140,000 and your required rate of return is 12 percent? 10 percent? 15 percent? (4 points)
9. You pay $10,000 per acre for a tract of land, and your opportunity cost (rate) is 6 percent. You hold the
land 12 years and pay $1,000 in taxes each year. What price per acre must you sell the land for to
break even with your opportunity cost (rate)? (4 points)
10. You can purchase a tract of land for $75,000 that you believe you can develop and sell as a residential
development. Your development costs are $60,000 to be incurred immediately. You expect to sell all
the lots in years 3-5 at a net income of $70,000, $85,000, and $68,000 respectively. Your required rate
of return is 12 percent. Do you purchase the tract of land? (4 points)
Page 4 of 4

Purchase answer to see full
attachment