At 45 years of age, Seth figured he wanted to work only 10 more years. Being a full-time landlord had a lot | ||||||

of advantages: cash flow, free time, being his own boss—but it was time to start thinking toward retirement. | ||||||

The real estate investments that he had made over the last 15 years had paid off handsomely. After selling a | ||||||

duplex and paying the associated taxes, Seth had $350,000 in the bank and was debt-free. With only 10 years | ||||||

before retirement, Seth wanted to make solid financial decisions that would limit his risk exposure. Fortunately, | ||||||

he had located another property that seemed to meet his needs— a well maintained four-unit apartment. The | ||||||

price tag was $250,000, well within his range, and the apartment would require no remodeling. Seth figured he | ||||||

could invest the other $100,000, and between the two hoped to have $1 million to retire on by age 55. | ||||||

1. Seth read an article in the local newspaper stating the real estate in the area had appreciated by 5% per year | ||||||

over the last 30 years. Assuming the article is correct, what would the future value of the $250,000 apartment | ||||||

be in 10 years? | ||||||

Initial Investment (PV) | ||||||

Quoted Rate | ||||||

Compounding Frequency | Choose one | |||||

Number of compoundings (m) | For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365 | |||||

Quoted Rate divided by m = RATE | ||||||

Number of Years | ||||||

NPER (Num. of years * m) | ||||||

Ending Amount (FV) | ||||||

2. Seth’s current bank offers a 1-year certiﬁcate of deposit account paying 2% compounded semiannually. | ||||||

A competitor bank is also offering 2%, but compounded daily. If Seth invests the $100,000, how much more | ||||||

money will he have in the second bank after one year, due to the daily compounding? | ||||||

Current Bank | Competitor Bank | |||||

Semiannually | Daily | |||||

Initial Investment (PV) | ||||||

Quoted Rate | ||||||

Compounding Frequency | Choose one | |||||

Number of compoundings (m) | For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365 | |||||

Quoted Rate divided by m = RATE | ||||||

Number of Years | ||||||

NPER (Num. of years * m) | ||||||

Ending Amount (FV) | ||||||

Difference in FV | =D36-C36 | |||||

3. After looking at the results from questions 1 and 2, Seth realizes that a 2% return in a certiﬁcate of deposit | ||||||

will never allow him to reach his goal of $1 million in 10 years. Presuming his apartment will indeed be worth | ||||||

$400,000 in 10 years, compute the future value of Seth’s $100,000 investment using a 10%, 15%, and 20% return | ||||||

compounded semiannually for 10 years. Will any of these rates of return allow him to accomplish his goal of | ||||||

reaching $1 million by age 55? | ||||||

10% | 15% | 20% | ||||

Initial Investment (PV) | ||||||

Quoted Rate | ||||||

Compounding Frequency | Semiannually | Semiannually | Semiannually | |||

Number of compoundings (m) | ||||||

Quoted Rate divided by m = RATE | ||||||

Number of Years | ||||||

NPER (Num. of years * m) | ||||||

Ending Amount (FV) | ||||||

Plus: Apartment Value | $400,000 | $400,000 | $400,000 | |||

Total FV | =FV + Apartment Value | |||||

Which rate of return allows him to accomplish his goal of reaching $1 million? | Choose one | |||||

4. A friend of Seth’s who is a real estate developer needs to borrow $80,000 to ﬁnish a development project. | ||||||

He is desperate for cash and offers Seth 18%, compounded monthly, for 2.5 years. Find the future value of | ||||||

the loan. | ||||||

Initial Investment (PV) | ||||||

Quoted Rate | ||||||

Compounding Frequency | Choose one | |||||

Number of compoundings (m) | For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365 | |||||

Quoted Rate divided by m = RATE | ||||||

Number of Years | ||||||

NPER (Num. of years * m) | ||||||

Ending Amount (FV) | ||||||

5. After purchasing the apartment, Seth receives a street, sewer, and gutter assessment for $12,500 due in 2 years. | ||||||

How much would he have to invest today in a CD paying 2%, compounded semiannually, to fully pay the assessment in 2 years? | ||||||

Future Value Needed (FV) | ||||||

Quoted Rate | ||||||

Compounding Frequency | Choose one | |||||

Number of compoundings (m) | ||||||

Quoted Rate divided by m = RATE | ||||||

Number of Years | ||||||

NPER (Num. of years * m) | ||||||

Amount Invested Now (PV) |

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