Chapter 3

(a) The future value of a $400 savings deposit after eight years at an annual interest rate of 3 percent. Use Table 1 (b) The future value of saving $1,800 a year for five years at an annual interest rate of 4 percent. Use Table 2. (c) The present value of a $6,000 savings account that will earn 3 percent interest for four years. Use Table 3.

(a) FV = PV × FV single sum table factor = $400 × 1.267 = $506.80 (b) FV = PMT × FV annuity table factor = $1,800 × 5.416 = $9,748.80 (c) PV = FV × PV single sum table factor = $6,000 × 0.888 = $5,328

Brenda plans to reduce her spending by $80 a month. Calculate the future value of this increase in savings over the next 10 years. (Assume an annual deposit to her savings account, and an annual interest rate of 5 percent.) Use Exhibit 1-B.

Annual savings = Monthly spending reduction×Number of months per year = $80 × 12 = $960 FV = PMT × FV annuity table factor = $960 × 12.578 = $12,074.88

Carl Lester has liquid assets of $2,680 and current liabilities of $2,436. (a) What is his current ratio? (b) Which comment best describes his financial position?

Current ratio= Liquid assets / Current liabilities = $2,680 / $2,436 = 1.1 A current ratio of 1.1 is generally viewed as less than desirable.

The Fram family has liabilities of $128,000 and a net worth of $340,000. What is their debt ratio?

Debt ratio= Liabilities / Net worth = $128,000 / $340,000 = 0.376

Bill and Sally Kaplan have an annual spending plan that amounts to $36,000. 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? Use Exhibit 1-A.

FV = PV × FV single sum table factor = $36,000 × 1.093 = $39,348

Kara George received a gift of $4,000 for graduation from her uncle. If she deposits the entire amount in an account paying 3 percent, what will be the value of this gift in 15 years? Use Exhibit 1-A.

FV = PV × FV single sum table factor = $4,000×1.558 =$6,232

Hal Thomas wants to establish a savings fund from which a community organization could draw $800 a year for 20 years. If the account earns 3 percent, what amount would he have to deposit now to achieve this goal? Use Exhibit 1-D.

PV = PMT × PV annuity table factor = $800 × 14.877 = $11,901.60

She actually spent $298 for food, $337 for transportation, $982 for housing, $134 for clothing, and $231 for personal expenses and recreation. Calculate the variance for each of these categories, and indicate whether it was a deficit or surplus.

Surplus (deficit)= Budgeted amount − Actual amount Food= $350 − 298 = $52 Transportation= $320 − 337 = -$17 Housing = $950 − 982 = -$32 Clothing = $100 − 134 = -$34 Personal expenses and recreation = $275 - 231 =$44 When the actual amount is less than the budgeted amount, you have a surplus. A deficit occurs when the actual amount exceeds the budgeted amount.

Use the following items to prepare a balance sheet and a cash flow statement. Determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows. Rent for the month 650 Monthly take-home salary1,950 Cash in checking 450 Savings account balance 1,890 Spending for food 345Balance of educational loan 2,160 value of automobile 7,800 Telephone bill 65 Credit card balance 235 Loan payment 80 Auto insurance 230 Household possessions 3,400 Stereo equipment 2,350 Electricity 90 Lunches/parking at work 180 Donations 70 Home computer 1,500 Value of stock investment 860 Clothing purchase 110 Restaurant spending 130

Total assets= $450+1,890+7,800+2,350+1,500+3,400+860 = $18,250 Total liabilities = $235+2,160 = $2,395 Net worth = $18,250-2,395 = $15,855 Total cash inflows= $1,950 Total cash outflows = $650+345+230+180+110+65+80+90+70+130= $1,950

Based on the following data, compute the total assets, total liabilities, and net worth. Balance Sheet Liquid assets $4,670 Household assets $93,780 Investment assets $26,910 Long-term liabilities $76,230 Current liabilities $2,670

Total assets= Liquid assets + Investment assets + Household assets = $4,670 + 26,910 + 93,780 = $125,360 Total liabilities = Current liabilities + Long-term liabilities = $2,670 + 76,230 = $78,900 Net worth = Total assets - Total liabilities = $125,360 - 78,900 = $46,460

For each of the following situations, compute the missing amount.

a. Net wort = Total assets - Total liabilities = $45,000 - 12,600 = $32,400 b. Total liabilities = Total assets - Net worth = $78,980 - 13,700 = $65,280 c. Net worth = Total assets - Total liabilities = $44,280 - 12,965 = $31,315 d. Total assets = Total liabilities + Net worth = $38,345 + 53,795 = $92,140