Chapter 09: Time Value of Money

Chapter 9
Time Value of Money
Discussion Questions
9-1. How is the future value (Appeni! A" relate to the present value of a sin#le
sum (Appeni! $"%
The future value represents the expected worth of a sin#le amount& whereas the
present value represents the 'urrent worth.
(V ) *V (1 + I"
n
future value
( )
lue *resent va
1
1
(V *V

+
=
n
i
9-,. How is the present value of a sin#le sum (Appeni! $" relate to the present
value of an annuity (Appeni! -"%
The present value of a sin#le amount is the is'ounte value for one future
payment& whereas the present value of an annuity represents the is'ounte
value of a series of 'onse'utive future payments of e.ual amount.
9-/. 0hy oes money have a time value%
Money has a time value 1e'ause funs re'eive toay 'an 1e investe to rea'h a
#reater value in the future. A person woul rather re'eive 21 toay than 21 in
ten years& 1e'ause a ollar re'eive toay& investe at 3 per'ent& is worth 21.491
after ten years.
9-5. -oes inflation have anythin# to o with ma6in# a ollar toay worth more than
a ollar tomorrow%
7nflation ma6es a ollar toay worth more than a ollar in the future. $e'ause
inflation tens to eroe the pur'hasin# power of money& funs re'eive toay
will 1e worth more than the same amount re'eive in the future.
9-1
Chapter 09: Time Value of Money
9-8. A9ust the annual formula for a future value of a sin#le amount at 1, per'ent
for 10 years to a semiannual 'ompounin# formula. 0hat are the interest
fa'tors ((V7(" 1efore an after% 0hy are they ifferent%
( )
:emiannual /.,04 ,0 n 3;& i
Annual 103 . / 10 n ;& 1, i
A Appeni! (V *V (V
7(
= =
= =
=
The more fre.uent 'ompounin# uner the semiannual 'ompounin#
assumption in'reases the future value so that semiannual 'ompounin# is worth
.101 more per ollar.
9-3. 7f& as an investor& you ha a 'hoi'e of aily& monthly& or .uarterly 'ompounin#&
whi'h woul you 'hoose% 0hy%
The #reater the num1er of 'ompounin# perios& the lar#er the future value.
The investor shoul 'hoose aily 'ompounin# over monthly or .uarterly.
9-4. 0hat is a eferre annuity%
A eferre annuity is an annuity in whi'h the e.ual payments will 1e#in at
some future point in time.
9-<. =ist five ifferent finan'ial appli'ations of the time value of money.
-ifferent finan'ial appli'ations of the time value of money:
>.uipment pur'hase or new prou't e'ision&
*resent value of a 'ontra't proviin# future payments&
(uture value of an investment&
?e#ular payment ne'essary to provie a future sum&
?e#ular payment ne'essary to amorti@e a loan&
-etermination of return on an investment&
-etermination of the value of a 1on.
Chapter 9
Problems
1. Future value (!"# Aou invest 2,&800 a year for three years at < per'ent.
a. 0hat is the value of your investment after one year% Multiply 2,&800 B 1.0<.
b. 0hat is the value of your investment after two years% Multiply your answer to part a
1y 1.0<.
9-,
Chapter 09: Time Value of Money
c. 0hat is the value of your investment after three years% Multiply your answer to part b
1y 1.0<. This #ives your final answer.
d. Confirm that your final answer is 'orre't 1y #oin# to Appeni! A (future value of 21"&
an loo6in# up the future value for n ) /& an i ) < per'ent. Multiply this ta1ular
value 1y 2,&800 an 'ompare your answer to the answer in part c. There may 1e a
sli#ht ifferen'e ue to rounin#.
9$%& 'olution(
a. 2,&800 B 1.0< ) 2,&400
1. 2,&400 B 1.0< ) 2,&913
'. 2,&913 B 1.0< ) 2/&159.,<
. Appeni! A (<;& / perios"
(V ) *V B (V
7(
2,&800 B 1.,30 ) 2/&180
,. Present value (!)# 0hat is the present value of:
a. 2<&000 in 10 years at 3 per'ent%
b. 213&000 in 8 years at 1, per'ent%
c. 2,8&000 in 18 years at < per'ent%
9&"& 'olution(
Appeni! $
*V ) (V B *V
7(
a. 2 <&000 B .88< ) 25&535
1. 213&000 B .834 ) 29&04,
'. 2,8&000 B ./18 ) 24&<48
/. Present Value (!)#
a. 0hat is the present value of 2100&000 to 1e re'eive after 50 years with an
1< per'ent is'ount rate%
b. 0oul the present value of the funs in part a 1e enou#h to 1uy a 21,8 'on'ert ti'6et%
9&)& 'olution(
9-/
Chapter 09: Time Value of Money
Appeni! $
*V ) (V B *V
7(
(1<;& 50 perios"
a. 2100&000 B .001 ) 2100
1. CD. Aou only have 2100 in present value.
5. Present Value (!*# Aou will re'eive 25&000 three years from now. The is'ount rate is
10 per'ent.
a. 0hat is the value of your investment two years from now% Multiply 25&000 B .909
(one yearEs is'ount rate at 10 per'ent".
b. 0hat is the value of your investment one year from now% Multiply your answer to
part a 1y .909 (one yearEs is'ount rate at 10 per'ent".
c. 0hat is the value of your investment toay% Multiply your answer to part b 1y .909
(one yearEs is'ount rate at 10 per'ent".
d. Confirm that your answer to part c is 'orre't 1y #oin# to Appeni! $ (present value
of 21" for n ) / an i ) 10;. Multiply this ta1ular value 1y 25&000 an 'ompare your
answer to part c. There may 1e a sli#ht ifferen'e ue to rounin#.
9$*& 'olution(
a. 25&000 B .909 ) 2/&3/3
1. 2/&3/3 B .909 ) 2/&/08.1,
'. 2/&/08.1, B .909 ) 2/&005./8
. Appeni! $ (10;& / perios"
(V ) (V B *V
7(
25&000 B.481 ) 2/&005.00
8. Future value (!"# 7f you invest 21,&000 toay& how mu'h will you have:
a. 7n 3 years at 4 per'ent%
b. 7n 18 years at 1, per'ent%
c. 7n ,8 years at 10 per'ent%
d. 7n ,8 years at 10 per'ent ('ompoune semiannually"%
9$+& 'olution(
Appeni! A
(V ) *V B (V
7(
9-5
Chapter 09: Time Value of Money
a. 21,&000 B 1.801 ) 2 1<&01,
1. 21,&000 B 8.545 ) 2 38&3<<
'. 21,&000 B 10.</8 ) 21/0&0,0
. 21,&000 B 11.534 ) 21/4&305 (8;& 80 perios"
3. Present value (!)# Aour aunt offers you a 'hoi'e of 2,0&000 in 80 years or 258 toay.
7f money is is'ounte at 1/ per'ent& whi'h shoul you 'hoose%
9$,& 'olution(
Appeni! $
*V ) (V B *V
7(
(1/;& 80 perios"
*V ) 2,0&000 B .00, ) 250
Choose 258 toay.
4. Present Value (!)# Aour un'le offers you a 'hoi'e of 2100&000 in 10 years or 258&000
toay. 7f money is is'ounte at < per'ent& whi'h shoul you 'hoose%
9$-& 'olution(
Appeni! $
*V ) (V B *V
7(
(<;& 10 perios"
*V ) 2100&000 B .53/ ) 253&/00
Choose 2100&000 after 10 years.
<. Present Value (!)# 7n *ro1lem 4& if you ha to wait until 1, years to #et the 2100&000&
woul your answer 'han#e% All other fa'tors remain the same.
9$.& 'olution(
Appeni! $
*V ) (V B *V
7(
(<;& 1, perios"
(V ) 2100&000 B ./94 ) 2/9&400
Choose 258&000 toay.
9-8
Chapter 09: Time Value of Money
9. Present Value (!)# Aou are #oin# to re'eive 2,00&000 in 80 years. 0hat is the ifferen'e
in present value 1etween usin# a is'ount rate of 18 per'ent versus 8 per'ent%
9$9& 'olution(
Appeni! $
2,00& 000 2,00& 000
.001 (18;&80" .1<4 (8;&80"
2,00 214& 500
The ifferen'e is 214&,00
214& 500
,00
214& ,00

10. Present Value (!)# How mu'h woul you have to invest toay to re'eive:
a. 21,&000 in 3 years at 1, per'ent%
b. 218&000 in 18 years at < per'ent%
c. 28&000 ea'h year for 10 years at < per'ent%
d. 250&000 ea'h year for 50 years at 8 per'ent%
9$%/& 'olution(
Appeni! $ (a an 1"
*V ) (V B *V
7(
a. 21,&000 B .804 ) 2 3&0<5
1. 218&000 B ./18 ) 2 5&4,8
Appeni! - (' an "
'. 2 8&000 B 3.410 ) 2 //&880
. 250&000 B 14.189 ) 23<3&/30
11. Future value (!"# 7f you invest 2<&000 per perio for the followin# num1er of perios&
how mu'h woul you have%
9-3
Chapter 09: Time Value of Money
a. 4 years at 9 per'ent.
b. 50 years at 11 per'ent.
9$%%& 'olution(
Appeni! C
(V
A
) A B (V
7(A
a. 2<&000 B 9.,0 ) 2 4/&300
1. 2<&000 B 8<1.</ ) 2 5&385&350
1,. Future value (!"# Aou invest a sin#le amount of 21,&000 for 8 years at 10 per'ent. At
the en of 8 years you ta6e the pro'ees an invest them for 1, years at 18 per'ent. How
mu'h will you have after 14 years%
9$%"& 'olution(
Appeni! A
(V ) *V B (V
7(
(8years& 10;"
21,&000 B 1.3,9 ) 219&85<
Appeni! A
(V ) *V B (V
7(
(18;& 1, perios"
219&85< B 8./80 ) 2105&8<,
1/. Present value (!)# Mrs. Crawfor will re'eive 23&800 a year for the ne!t 15 years from
her trust. 7f a < per'ent interest rate is applie& what is the 'urrent value of the future
payments%
9$%)& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(<;& 15 perios"
) 23&800 B <.,55 ) 28/&8<3
15. Present value (!)# Fohn =on#waite will re'eive 2100&000 in 80 years. His friens are
very 9ealous of him. 7f the funs are is'ounte 1a'6 at a rate of 15 per'ent& what is the
present value of his future Gpot of #olH%
9-4
Chapter 09: Time Value of Money
9$%*& 'olution(
Appeni! $
*V ) (V B *V
7(
(15;& 80 perios"
) 2100&000 B .001 ) 2100
18. Present Value (!)# :herwin 0illiams will re'eive 21<&000 a year for the ne!t ,8 years
as a result of a pi'ture he has painte. 7f a is'ount rate of 10 per'ent is applie& shoul he
1e willin# to sell out his future ri#hts now for 2130&000%
9$%+& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(10;& ,8 perios"
*V
A
) 21<&000 B 9.044 ) 213/&/<3
Co& the present value of the annuity is worth more than 2130&000.
13. Present value (!)# Ieneral Mills will re'eive 2,4&800 per year for the ne!t 10 years as a
payment for a weapon he invente. 7f a 1, per'ent rate is applie& shoul he 1e willin# to
sell out his future ri#hts now for 2130&000%
9$%,& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(1,;& 10 perios"
*V
A
) 2,4&800 B 8.380 ) 2188&/48
Aes& the present value of the annuity is worth less than 2130&000.
14. Present value (!)# The 0estern :weepsta6es has 9ust informe you that you have won
21 million. The amount is to 1e pai out at the rate of 280&000 a year for the ne!t ,0 years.
0ith a is'ount rate of 1, per'ent& what is the present value of your winnin#s%
9$%-& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(1,;& ,0 perios"
*V
A
) 280&000 B 4.539 ) 2/4/&580
9-<
Chapter 09: Time Value of Money
1<. Present value (!)# ?ita Ion@ales won the 230 million lottery. :he is to re'eive
21 million a year for the ne!t 80 years plus an aitional lump sum payment of 210 million
after 80 years. The is'ount rate is 10 per'ent. 0hat is the 'urrent value of her winnin#s%
9$%.& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(10;& 80 perios"
*V
A
) 21&000&000 B 9.918 ) 29&918&000
Appeni! $
*V ) (V B *V
7(
(10;& 80 perios"
*V ) 210&000&000 B .009 ) 290&000
2 9&918&000
90&000
210&008&000
19. Future value (!"# $ru'e :utter invests 2,&000 in a mint 'onition Colan ?yan 1ase1all
'ar. He e!pe'ts the 'ar to in'rease in value ,0 per'ent a year for the ne!t five years.
After that& he anti'ipates a 18 per'ent annual in'rease for the ne!t three years. 0hat is the
pro9e'te value of the 'ar after ei#ht years%
9$%9& 'olution(
Appeni! A
(V ) *V B (V
7(
(,0;& 8 perios"
) 2,&000 B ,.5<< ) 25&943
(V ) *V B (V
7(
(18;& / perios"
) 25&943 B 1.8,1 ) 24&83<.80
,0. Future value (!"# Christy ?ee has 1een epositin# 21&800 in her savin#s a''ount every
-e'em1er sin'e ,001. Her a''ount earns 3 per'ent 'ompoune annually. How mu'h will
she have in -e'em1er ,010% (Assume that a eposit is mae in -e'em1er of ,010. Ma6e
sure to 'ount the years 'arefully."
9-9
Chapter 09: Time Value of Money
9$"/& 'olution(
Appeni! C
(V
A
) A B (V
7(A
(3;& n ) 10"
(V
A
) 21&800 B 1/.1<1 ) 219&441.80
,1. Future value (!"# At a #rowth (interest" rate of < per'ent annually& how lon# will it ta6e
for a sum to ou1le% To triple% :ele't the year that is 'losest to the 'orre't answer.
9$"%& 'olution(
Appeni! A
7f the sum is ou1lin#& then the ta1ular value must e.ual ,.
7n Appeni! A& loo6in# own the <; 'olumn& we fin the fa'tor
'losest to , (1.999" on the 9-year row. The fa'tor 'losest to /
(,.9/4" is on the 15-year row.
,,. Present value (!)# 7f you owe 2/0&000 paya1le at the en of five years& what amount
shoul your 'reitor a''ept in payment immeiately if she 'oul earn 11 per'ent on her
money%
9$""& 'olution(
Appeni! $
*V ) (V B *V
7(
(11;& 8 perios"
*V ) 2/0&000 B .89/ ) 214&490
,/. Present value (!)# $arney :mith invests in a sto'6 that will pay iviens of 2/.00 at
the en of the first yearJ 2/./0 at the en of the se'on yearJ an 2/.30 at the en of the
thir year. Also& he 1elieves that at the en of the thir year he will 1e a1le to sell the sto'6
for 280. 0hat is the present value of all future 1enefits if a is'ount rate of 11 per'ent is
applie% (?oun all values to two pla'es to the ri#ht of the e'imal point."
9$")& 'olution(
9-10
Chapter 09: Time Value of Money
Appeni! $
*V ) (V B *V
7(
-is'ount rate ) 11;
2 /.00 B .901 ) 2 ,.40
/./0 B .<1, ) ,.3<
/.30 B .4/1 ) ,.3/
80.00 B .4/1 ) /3 .88
255.83
,5. Present value (!)# Mr. (lint retire as presient of Color Title Company 1ut is 'urrently
on a 'onsultin# 'ontra't for 258&000 per year for the ne!t 10 years.
a. 7f Mr. (lintEs opportunity 'ost (potential return" is 10 per'ent& what is the present
value of his 'onsultin# 'ontra't%
b. Assumin# that Mr. (lint will not retire for two more years an will not start to re'eive
his 10 payments until the en of the thir year& what woul 1e the value of his
eferre annuity%
9&"*& 'olution(
0sin1 a T2o 'tep Procedure
Appeni! -
a. *V
A
) A B *V
7(A
(i ) 10;& 10 perios"
) 258&000 B 3.158 ) 2,43&8,8
Appeni! $
1. *V ) (V B *V
7(
(i ) 10;& , perios"
2,43&8,8 B .<,3 ) 2,,<&510
3lternative 'olution
Appeni! -
a. *V
A
) A B *V
7(A
(10;& 10 perios"
*V
A
) 258&000 B 3.158 ) 2,43&8,8
9-11
Chapter 09: Time Value of Money
1. -eferre annuity-Appeni! -
*V
A
) 258&000 (3.<15 K 1.4/3" where n ) 1,J n ) , an
i ) 10;
) 258&000(8.04<"
) 2,,<&810 (or use a two step solution"
The answer is sli#htly ifferent from the answer a1ove ue to
rounin# in the ta1les.
,8 Quarterly compoundin1 (!+# Cousin $ertha investe 2100&000 10 years a#o at 1,
per'ent& 'ompoune .uarterly. How mu'h has she a''umulate%
9$"+& 'olution(
Appeni! A
(V ) *V B (V
7(
(/;& 50 perios"
(V ) 2100&000 B /.,3, ) 2/,3&,00
,3. 'pecial compoundin1 (!+# -etermine the amount of money in a savin#s a''ount at the
en of five years& #iven an initial eposit of 2/&000 an a < per'ent annual interest rate
when interest is 'ompoune (a" annually& (1" semiannually& an ('" .uarterly.
9$",& 'olution(
Appeni! A
(V ) *V B (V
7(
a. 2/&000 B 1.539 ) 25&504 (n)8J i)<;"
1. 2/&000 B 1.5<0 ) 25&550 (n)10J i)5;"
'. 2/&000 B 1.5<3 ) 25&58< (n),0J i),;"
9-1,
Chapter 09: Time Value of Money
,4. 3nnuity due (!*# As state in the 'hapter& annuity payments are assume to 'ome at the
en of ea'h payment perio (terme an orinary annuity". However& an e!'eption o''urs
when the annuity payments 'ome at the 1e#innin# of ea'h perio (terme an annuity ue".
To fin the present value of an annuity ue& su1tra't 1 from n an a 1 to the ta1ular
value. To fin the future value of an annuity& a 1 to n an su1tra't 1 from the ta1ular
value. (or e!ample& to fin the future value of a 2100 payment at the 1e#innin# of ea'h
perio for five perios at 10 per'ent& #o to Appeni! C for n ) 3 an i ) 10 per'ent. =oo6
up the value of 4.413 an su1tra't 1 from it for an answer of 3.413 or 2341.30 (2100 B
3.413".
0hat is the future value of a 10-year annuity of 2,&000 per perio where payments
'ome at the 1e#innin# of ea'h perio% The interest rate is < per'ent.
9$"-& 'olution(
Appeni! C
(V
A
) A B (V
7(A
n ) 11& i ) <; 13.358 K 1 ) 18.358
(V
A
) 2,&000 B 18.358 ) 2/1&,90
,<. 3nnuity due (!*# ?elate to the is'ussion in pro1lem ,4& what is the present value of
a 10-year annuity of 2/&000 per perio in whi'h payments 'ome at the 1e#innin# of ea'h
perio% The interest rate is 1, per'ent.
9$".& 'olution(
Appeni! -
*V
A
) A B *V
7(A
n ) 9& i ) 1,; 8./,< + 1 ) 3./,<
*V
A
) 2/&000 B 3./,< ) 21<&9<5
,9. Present value alternative (!)# Aour #ranfather has offere you a 'hoi'e of one of the
three followin# alternatives: 28&000 nowJ 21&000 a year for ei#ht yearsJ or 21,&000 at the
en of ei#ht years. Assumin# you 'oul earn 11 per'ent annually& whi'h alternative shoul
you 'hoose% 7f you 'oul earn 1, per'ent annually& woul you still 'hoose the same
alternative%
9$"9& 'olution(
9-1/
Chapter 09: Time Value of Money
(first alternative" *resent value of 28&000 re'eive now:
28&000
(se'on alternative" *resent value of annuity of 21&000 for ei#ht
years: Appeni! -
A 7(A
7(A
*V AB*V
21& 000 *V (11;& <years"
21& 000 8.153
28&153
=
=
=
=
(thir alternative" *resent value of 21,&000 re'eive in ei#ht
years: Appeni! $
7(
7(
*V (VB*V
21,& 000B*V (11;& <years"
21,& 000B.5/5
28& ,0<
=
=
=
=
:ele't 21,&000 to 1e re'eive in ei#ht years.
9$"9& (Continued#
4evised ans2ers based on %"5&
(first alternative" *resent value of 28&000 re'eive toay: 28&000
(se'on alternative" *resent value of annuity of 21&000 at 1,; for
< years: Appeni! -
9-15
Chapter 09: Time Value of Money
A 7(A
7(A
*V A *V
21& 000 *V (1,;& <years"
21& 000 5.93<
25&93<
=
=
=
=
(thir alternative" *resent value of 21,&000 re'eive in < years at
1,;: Appeni! $
7(
7(
*V ) (VB*V
) 21,& 000B*V (1,;& <years"
) 21,& 000B.505
) 25&<5<
:ele't 28&000 now. As the interest rate (is'ount rate" in'reases
the present value e'lines.
/0. Payment re6uired (!*# Aou nee 2,/&983 at the en of nine years& an your only
investment outlet is an 4 per'ent lon#-term 'ertifi'ate of eposit ('ompoune annually".
0ith the 'ertifi'ate of eposit& you ma6e an initial investment at the 1e#innin# of the first
year.
a. 0hat sin#le payment 'oul 1e mae at the 1e#innin# of the first year to a'hieve this
o19e'tive%
b. 0hat amount 'oul you pay at the en of ea'h year annually for nine years to a'hieve
this same o19e'tive%
9$)/& 'olution(
a. Appeni! $
*V) (V B *V
7(
(4;& 9 perios"
*V) 2,/&983 B .855 ) 21/&0/,.03
9-18
Chapter 09: Time Value of Money
1. Appeni! C
A ) (V
A
L(V
7(A
A ) 2,/&983L11.94< ) 2,&000 per year
/1. Quarterly compoundin1 (!+# $everly Hills starte a paper route on Fanuary 1& ,005.
>very three months& she eposits 2/00 in her 1an6 a''ount& whi'h earns < per'ent annually
1ut is 'ompoune .uarterly. Dn -e'em1er /1& ,004& she use the entire 1alan'e in her
1an6 a''ount to invest in an investment at 1, per'ent annually. How mu'h will she have on
-e'em1er /1& ,010%
9$)%& 'olution(
Appeni! C
(V
A
) A B (V
7(A
(,;& 13 perios"
(V
A
) 2/00 B 1<.3/9 ) 28&891.40 after four years
Appeni! A
(V ) *V B (V
7(
(1,;& / perios"
(V ) 28&891.40 B 1.508
(V ) 24&<83./5 after three more years
/,. 7ield (!*# (ran6lin Templeton has 9ust investe 2<&430 for her son (a#e one". This
money will 1e use for his sonEs eu'ation 14 years from now. He 'al'ulates that he will
nee 230&000 1y the time the 1oy #oes to s'hool. 0hat rate of return will Mr. Templeton
nee in orer to a'hieve this #oal%
9$)"& 'olution(
Appeni! $
7(
7(
*V
*V ) (14 perios"
(V
2<& 430
*V ) .153 ?ate of return 1,;
230& 000
= =
Dr
9-13
Chapter 09: Time Value of Money
Alternative solution
Appeni! A
7(
7(
(V
(V (14 perios"
*V
230& 000
(V 3.<38 ?ate of return 1,;
2<& 430
=
= = =
//. 7ield 2ith interpolation (!*# Dn Fanuary 1& ,00<& Mr. -ow 1ou#ht 100 shares of sto'6
at 21, per share. Dn -e'em1er /1& ,010& he sol the sto'6 for 21< per share. 0hat is his
annual rate of return% 7nterpolate to fin the answer.
9$))& 'olution(
Appeni! $
7(
*V
*V
(V
=
7(
21,
*V .334
21<
= =
?eturn is 1etween 15;-18; for / years
7(
7(
*V at 15; .348
*V at 18; .38<
.014

7(
7(
*( at 15; .348
*V 'ompute .334
.00<

15; + (.00<L.014" (1;"

15; + .541 (1;"
15.54;
9-14
Chapter 09: Time Value of Money
/5. 7ield 2ith interpolation (!*# C. -. ?om has 9ust #iven an insuran'e 'ompany 2/0&000.
7n return& he will re'eive an annuity of 2/&,00 for ,0 years.
At what rate of return must the insuran'e 'ompany invest this 2/0&000 in orer to ma6e
the annual payments% 7nterpolate.
9$)*& 'olution(
Appeni! -
7(A A
*V *V L A (,0perios"
2/0&000 L 2/&,00
9./48 is 1etween <; an 9; for ,0 perios
=
=
=
7(A
7(A
*V at <; 9.<1<
*V at 9; 9.1,9
.3<9

7(A
7(A
*V at <; 9.<1<
*V 'ompute 9./48
.55/

<; + (.55/L.3<9" (1;"

<; + .35/ (1;" ) <.35;
/8. 'olvin1 for an annuity (!*# Ale! $ell has 9ust retire from the telephone 'ompany. His
total pension funs have an a''umulate value of 2,00&000& an his life e!pe'tan'y is 13
more years. His pension fun mana#er assumes he 'an earn a 1, per'ent return on his
assets.
0hat will 1e his yearly annuity for the ne!t 13 years%
9$)+& 'olution(
Appeni! -
A 7(A
A *V L *V (1,;&13perios"
2,00& 000 L 3.945
2,<& 344.98
=
=
=
9-1<
Chapter 09: Time Value of Money
/3. 'olvin1 for an annuity (!*# -r. Dats& a nutrition professor& invests 2<0&000 in a pie'e of
lan that is e!pe'te to in'rease in value 1y 15 per'ent per year for the ne!t five years. :he
will then ta6e the pro'ees an provie herself with a 10-year annuity. Assumin# a 15
per'ent interest rate for the annuity& how mu'h will this annuity 1e%
9$),& 'olution(
Appeni! A
(V ) *V B (V
7(
(15;& 8 perios"
(V ) 2<0&000 B 1.9,8 ) 2185&000
Appeni! -
A ) *V
A
L*V
7(A
(15;& 10 perios"
A ) 2185&000L8.,13 ) 2,9&8,5.85
/4. 'olvin1 for an annuity (!*# Aou wish to retire in ,0 years& at whi'h time you want to
have a''umulate enou#h money to re'eive an annual annuity of 21,&000 for ,8 years after
retirement. -urin# the perio 1efore retirement you 'an earn < per'ent annually& while
after retirement you 'an earn 10 per'ent on your money.
0hat annual 'ontri1utions to the retirement fun will allow you to re'eive the 21,&000
annuity%
9$)-& 'olution(
-etermine the present value of an annuity urin# retirement:
Appeni! -
A 7(A
*V A *V (10;& ,8years"
21,&000 9.044 210<&9,5
=
= =
To etermine the annual eposit into an a''ount earnin# <; that
is ne'essary to a''umulate 210<&9,5 after ,0 years& use the
(uture Value of an Annuity ta1le: Appeni! C
9-19
Chapter 09: Time Value of Money
A 7(A
A (V L (V (<;& ,0 years"
210<&9,5
) 2,&/<0.,/ annual 'ontri1ution
58.43,
=
=
/<. Deferred annuity (!)# ?usty :teele will re'eive the followin# payments at the en of
the ne!t three years: 25&000& 24&000& an 29&000. Then from the en of the fourth year
throu#h the en of the tenth year& he will re'eive an annuity of 210&000. At a is'ount rate
of 10 per'ent& what is the present value of all future 1enefits%
9$).& 'olution(
(irst fin the present value of the first three payments.
*V ) (V B *V
7(
(Appeni! $" i ) 10;
1" 25&000 B .909 ) 2/&3/3
," 4&000 B .<,3 ) 8&4<,
/" 9&000 B .481 ) 3&489
213&144
Then fin the present value of the eferre annuity.
Appeni! - will #ive a fa'tor for a seven perio annuity (fourth
year throu#h the tenth year" at a is'ount rate of 10 per'ent. The
value of the annuity at the 1e#innin# of the fourth year is:
A
7(A
*V A *V (10;& 4perios"
210&000 5.<3< 25<&3<0
=
= =
This value at the 1e#innin# of year four (en of year three" must
now 1e is'ounte 1a'6 for three years to #et the present value of
the eferre annuity. Mse Appeni! $.
9-,0
Chapter 09: Time Value of Money
7(A
*V (V *V (10;&/perios"
25<&3<0 .481 2/3.889
=
= =
(inally& fin the total present value of all future payments.
*resent value of first three payments 213&144
*resent value of the eferre annuity /3&889
28,&4/3
9$).& (Continued#
!4
Ta6e the *V
7(A
for 10 years at 10; an su1tra't the *V
7(A
for /
years at 10; to en up with the 4 year eferre annuity.
*V
7(A
)

3.158 (10 years at 10;"

*V
7(A
)

,.5<4 ( / years at 10;"
*V
7(A
)

/.38< (years 5 throu#h 10 years at 10;"
210&000 B /.38< ) 2/3&8<0
*resent value of first three payments 213&144
*resent value of the eferre annuity /3&8<0
28,&484
/9. Present value (!)# Nelly Ireene has a 'ontra't in whi'h she will re'eive the followin#
payments for the ne!t five years: 2/&000& 25&000& 28&000& 23&000& an 24&000. :he will then
re'eive an annuity of 29&000 a year from the en of the si!th throu#h the en of the 18th
year. The appropriate is'ount rate is 1/ per'ent. 7f she is offere 250&000 to 'an'el the
'ontra't& shoul she o it%
9$)9& 'olution(
(irst fin the present value of the first five payments.
*V ) (V B *V
7(
(Appeni! $" i ) 1/;
9-,1
Chapter 09: Time Value of Money
1" 2/&000 B .<<8 ) 2 ,&388
," 5&000 B .4</ ) /&1/,
/" 8&000 B .39/ ) /&538
5" 3&000 B .31/ ) /&34<
8" 4&000 B .85/ ) /&<01
213&4/1
Then fin the present value of the eferre annuity.
Appeni! - will #ive a fa'tor for a ten perio annuity (si!th year
throu#h the fifteenth year" at a is'ount rate of 1/ per'ent. The
value of the annuity at the 1e#innin# of the si!th year is:
A
7(A
*V A *V (1/;& 10perios"
29&000 8.5,3 25<&</5
=
= =
This value at the 1e#innin# of year si! (en of year five" must
now 1e is'ounte 1a'6 for five years to #et the present value of
the eferre annuity. Mse Appeni! $.
7(
*V ) (V B *V (1/;& 8perios"
) 25<&</5 B.85/ ) 2,3&814
9$)9& (Continued#
Ce!t& fin the total present value of all future payments.
*resent value of first three payments 213&4/1
*resent value of the eferre annuity ,3&814
25/&,5<
:in'e the present value of all future 1enefits uner the 'ontra't is
#reater than 250&000& Nelly Ireene shoul not a''ept this amount
to 'an'el the 'ontra't.
9-,,
Chapter 09: Time Value of Money
50. Deferred annuity (!)# Nay Mart has pur'hase an annuity to 1e#in payment at the en
of ,11/ (the ate of the first payment". Assume it is now the 1e#innin# of ,011. The
annuity is for 21,&000 per year an is esi#ne to last ei#ht years.
7f the is'ount rate for the 'al'ulation is 11 per'ent& what is the most she shoul have pai
for the annuity%
9$*/& 'olution(
Appeni! - will #ive a fa'tor for an < year annuity when the
appropriate is'ount rate is 11 per'ent (8.153". The value of the
annuity at the 1e#innin# of the year it starts (,11/" is:
A 7(A
*V A *V (11;& <perios"
21,&000 8.153
231&48,
=
=
=
The present value at the 1e#innin# of ,011 is foun usin#
Appeni! $ (, years at 11;". The fa'tor is .<1,. Cote we are
is'ountin# from the 1e#innin# of ,11/ to the 1e#innin# of ,011.
7(
*V ) *VB *V (11;& ,perios"
) 231& 48, B.<1,
) 280&15,.3,
The ma!imum that shoul 1e pai for the annuity is 280&15,.3,.
51. 7ield (!*# 7f you 1orrow 29&4,8 an are re.uire to pay 1a'6 the loan in five e.ual
annual installments of 2,&800& what is the interest rate asso'iate with the loan%
9$*%& 'olution(
Appeni! -
9-,/
Chapter 09: Time Value of Money
7(A A
*V *V L A (8 perios"
29&4,8L2,&800
/.<90
=
=
=
7nterest rate ) 9 per'ent
Io a'ross perio 8 until you fin /.<90. Io up to the per'enta#e
at the top of the 'olumn an fin 9 per'ent.
5,. oan repayment (!*# Tom $us1y owes 2,0&000 now. A lener will 'arry the e1t for
four more years at < per'ent interest. That is& in this parti'ular 'ase& the amount owe will
#o up 1y < per'ent per year for four years. The lener then will re.uire $us1y to pay off the
loan over 1, years at 11 per'ent interest. 0hat will his annual payment 1e%
9$*"& 'olution(
Appeni! A
7(A
(V ) *VB (V (<;& 5perios"
(V ) 2,0& 000 B1./30
) 2,4& ,00 Amount owe at en of 5 perios
Appeni! -
A 7(A
A ) *V L*V (11;& 1,perios"
) 2,4& ,00L3.59,
) 25&1<9.44 Annual payment re.uire
5/. oan repayment (!*# 7f your aunt 1orrows 280&000 from the 1an6 at 10 per'ent interest
over the ei#ht-year life of the loan& what e.ual annual payments must 1e mae to is'har#e
the loan& plus pay the 1an6 its re.uire rate of interest (roun to the nearest ollar"% How
mu'h of his first payment will 1e applie to interest% To prin'ipal% How mu'h of her
se'on payment will 1e applie to ea'h%
9$*)& 'olution(
9-,5
Chapter 09: Time Value of Money
Appeni! -
A 7(A
A ) *V L *V (10;& <perios"
) 280& 000 L 8.//8
) 29&/4,.04 Annual payments
(irst payment:
280&000 B .10 ) 28&000 first year interest
29&/4,.04 K 28&000 ) 25&/4,.04 applie to prin'ipal
:e'on payment: (irst etermine remainin# prin'ipal
280&000 K 25&/4,.04 ) 258&3,4.9/
258&3,4.9/ B .10 ) 25&83,.49 se'on year interest
29&/4,.04 K 25&83,.49 ) 25&<09.,< applie to prin'ipal
55. oan repayment (!*# Fim Thorpe 1orrows 240&000 towar the pur'hase of a home at 1,
per'ent interest. His mort#a#e is for /0 years.
a. How mu'h will his annual payments 1e% (Althou#h home payments are usually on a
monthly 1asis& we shall o our analysis on an annual 1asis for ease of 'omputation.
0e will #et a reasona1ly a''urate answer."
b. How mu'h interest will he pay over the life of the loan%
c. How mu'h shoul he 1e willin# to pay to #et out of a 1, per'ent mort#a#e an into a
10 per'ent mort#a#e with /0 years remainin# on the mort#a#e% :u##estion: (in the
annual savin#s an then is'ount them 1a'6 to the present at the 'urrent interest rate
(10 per'ent".
9$**& 'olution(
Appeni! -
A 7(A
a. A ) *V L *V (1,;& /0perios"
) 240& 000 L <.088
) 2<& 390.,8
9-,8
Chapter 09: Time Value of Money
1. 2 <& 390.,8 annual payments
B /0 years
2,30& 404.80 total payment
40& 000.00 repayment of prin'ipal
2190& 404.80 interest pai over life of loan

Appeni! -
'. Cew payments at 10;
A 7(A
A ) *V L *V (10;& /0 perios"
) 240& 000 L 9.5,4
) 24& 5,8.5<
9$**& (Continued#
-ifferen'e 1etween ol an new payments
2<& 390.,8 ol
4& 5,8.5< new
21&,35.44 ifferen'e
*.V. of ifferen'e K Appeni! -
A 7(A
*V A *V (assumes 10; is'ount rate& /0 perios"
2 1&,35.44 9.5,4
211&9,,.99 Amount that 'oul 1e pai to refinan'e
=
=
=
9-,3
Chapter 09: Time Value of Money
58. 3nnuity 2ith chan1in1 interest rates (!*# Aou are 'hairperson of the investment fun
for the Continental :o''er =ea#ue. Aou are as6e to set up a fun of semiannual payments
to 1e 'ompoune semiannually to a''umulate a sum of 2,00&000 after 10 years at an <
per'ent annual rate (,0 payments". The first payment into the fun is to ta6e pla'e si!
months from toay& an the last payment is to ta6e pla'e at the en of the 10th year.
a. -etermine how mu'h the semiannual payment shoul 1e. (?oun to whole num1ers."
Dn the ay after the si!th payment is mae (the 1e#innin# of the fourth year" the interest
rate #oes up to a 10 per'ent annual rate& an you 'an earn a 10 per'ent annual rate on funs
that have 1een a''umulate as well as all future payments into the fun. 7nterest is to 1e
'ompoune semiannually on all funs.
b. -etermine how mu'h the revise semiannual payments shoul 1e after this rate
'han#e (there are 15 payments an 'ompounin# ates". The ne!t payment will 1e in
the mile of the fourth year. (?oun all values to whole num1ers."
9$*+& 'olution(
Appeni! C
A 7(A
a. A (V L (V
2,00&000 L ,9.44<(5;& ,0 perios"
23&413
=
=
=
1. (irst etermine how mu'h the ol payments are e.ual to after
3 perios at 5;. Appeni! C.
A 7(A
(V ) A B (V (5;& 3 perios"
) 23& 413 B 3.3//
) 255& 854
Then etermine how mu'h this value will #row to after 15
perios at 8; (semi-annual rate".
Appeni! A
7(
(V ) *V B (V (8;& 15 perios"
) 255& 854 B1.9<0
) 2<<& ,0/
9-,4
Chapter 09: Time Value of Money
9$*+& (Continued#
:u1tra't this value from 2,00&000 to etermine how mu'h you
nee to a''umulate on the ne!t 15 payments.
2,00& 000
<<& ,0/
2111& 494

-etermine the revise semi-annual payment ne'essary to

a''umulate this sum after 15 perios at 8;.
Appeni! C
A ) (V
A
L(V
7(A

A ) 2111&494L19.899
A ) 28&405
53. 3nnuity consideration (!*# Aour youn#er sister& $rittany& will start 'olle#e in five years.
:he has 9ust informe your parents that she wants to #o to >astern :tate M.& whi'h will 'ost
2/0&000 per year for four years ('ost assume to 'ome at the en of ea'h year".
Anti'ipatin# $rittanyEs am1itions& your parents starte investin# 28&000 per year five years
a#o an will 'ontinue to o so for five more years.
How mu'h more will your parents have to invest ea'h year for the ne!t five years to
have the ne'essary funs for $rittanyEs eu'ation% Mse 10 per'ent as the appropriate
interest rate throu#hout this pro1lem (for is'ountin# or 'ompounin#". ?oun all values to
whole num1ers.
9$*,& 'olution(
*resent value of 'olle#e 'osts
Appeni! -
9-,<
Chapter 09: Time Value of Money
A 7(A
*V ) A B *V (10;& 5 perios"
) 2/0& 000 B /.140
) 298&100
A''umulation 1ase on investin# 28&000 per year for 10 years.
Appeni! C
A 7(A
(V ) A B (V (10;& 10 perios"
) 28& 000 B 18.9/4
) 249& 3<8
Aitional funs re.uire 8 years from now when $rittany starts
'olle#e.
298&100 *V of 'olle#e 'osts
49&3<8 A''umulation 1ase on 28&000 per year
218&518 Aitional funs re.uire in five years
Aitional annual 'ontri1ution re.uire 1etween now an the
time $rittany starts 'olle#e in 8 years.
9$*,& (Continued#
Appeni! C
A 7(A
A ) (V L (V (10;& 8 perios"
) 218& 518 L 3.108
) 2,& 8,8
9-,9
Chapter 09: Time Value of Money
54. 'pecial consideration of annuities and time periods (!*# $rittany (from pro1lem 53" is
now 1< years ol (five years have passe"& an she wants to #et marrie instea of #oin# to
'olle#e. Aour parents have a''umulate the ne'essary funs for her eu'ation.
7nstea of her s'hoolin#& your parents are payin# 210&000 for her 'urrent wein# an
plan to ta6e year-en va'ations 'ostin# 2/&000 per year for the ne!t three years.
How mu'h money will your parents have at the en of three years to help you with
#rauate s'hool& whi'h you will start then% Aou plan to wor6 on a masterEs an perhaps a
*h-. 7f #rauate s'hool 'osts 2/,&300 per year& appro!imately how lon# will you 1e a1le to
stay in s'hool 1ase on these funs% Mse 10 per'ent as the appropriate interest rate
throu#hout this pro1lem. (?oun all values to whole num1ers.
9$*-& 'olution(
(uns availa1le after the wein#
298&100 (unin# availa1le 1efore the wein#
K 10&000 0ein#
<8&100 (uns availa1le after the wein#
=ess present value of va'ation
Appeni! -
A 7(A
*V A *V (10;& / perios"
2/& 000 ,.5<4 ) 24& 531
=
=
2<8&100
K 4&531
244&3/9 ?emainin# funs for #rauate s'hool
Availa1le funs after / years.
9-/0
Chapter 09: Time Value of Money
9$*-& (Continued#
Appeni! A
7(
(V *V (10;& / perios"
244& 3/9 1.//1
210/& //< (uns availa1le for startin# #rauate s'hool
=
=
=
Cum1er of years of #rauate eu'ation
Appeni! -
A
7(A
*V
*V (10;"
A
210/& //<
/.140 (roune"
2/,& 300
=
= =
with i ) 10;& n ) 5 for /.140& the answer is 5 years.
C!MP4898:';V8 P4!<8M
Modern =eapons> ;nc& (Comprehensive time value of money# Mr. ?am1o& *resient of
Moern 0eapons& 7n'.& was please to hear that he ha three offers from ma9or efense
'ompanies for his latest missile firin# automati' e9e'tor. He will use a is'ount rate of 1, per'ent
to evaluate ea'h offer.
9-/1
Chapter 09: Time Value of Money
Offer 7 2800&000 now plus 21,0&000 from the en of years 3 throu#h 18. Also if the prou't
#oes over 280 million in 'umulative sales 1y the en of year 18& he will re'eive an
aitional 21&800&000. ?am1o thou#ht there was a 48 per'ent pro1a1ility this woul
happen.
Offer II Twenty-five per'ent of the 1uyerEs #ross mar#in for the ne!t four years. The 1uyer in
this 'ase is Air -efense& 7n'. (A-7". 7ts #ross mar#in is 38 per'ent. :ales for year 1
are pro9e'te to 1e 21 million an then #row 1y 50 per'ent per year. This amount is
pai toay an is not is'ounte.
Offer III A trust fun woul 1e set up for the ne!t nine years. At the en of that perio&
?am1o woul re'eive the pro'ees (an is'ount them 1a'6 to the present at
1, per'ent". The trust fun 'alle for semiannual payments for the ne!t nine years of
2<0&000 (a total of 2130&000 per year". The payments woul start immeiately. :in'e
the payments are 'omin# at the 1e#innin# of ea'h perio instea of the en& this is
an annuity ue. To loo6 up the future value of the annuity ue in the ta1les& a 1 to
n (1< + 1" an su1tra't 1 from the value in the ta1le. Assume the annual interest rate
on this annuity is 1, per'ent annually (3 per'ent semiannually". -etermine the
present value of the trust funEs final value.
?e.uire: (in the present value of ea'h of the three offers an then ini'ate whi'h
one has the hi#hest present value.
CP 9$%& 'olution(
Modern =eapons> ;nc&
Offer I
2800&000 now plus:
21,0&000 from year si! throu#h fifteen (eferre annuity"
21&800&000 48; potential 1onus if sales pass 280 million
Appeni! -
A 7(A
*V ) AB *V (1,;& 10 years"
) 21,0& 000 B 8.380
) 234<& 000 (present value at the 1e#innin# of
year 3& i.e.& the en of year 8"
Appeni! $
7(
*V (V *V (1,;& 8 years"
234<&000 .834 2/<5&5,3
=
= =
9-/,
Chapter 09: Time Value of Money
*ro1a1ility of 1onus ) 48;
.48 B 21&800&000 ) 21&1,8&000
Appeni! $
7(
*V (V *V (1,;& n 18"
21&1,8&000 .1</ 2,08&<48
= =
= =
Total value of Dffer 7
2800&000 *ayment toay
/<5&5,3 *resent value of eferre annuity
,08&<48 *resent value of 21.8 million 1onus
21&090&/01
CP 9$%& (Continued#
Offer II
'ales ?ross Profit Payment "+5
7ear (*/5 ?ro2th# (,+5 of 'ales# of ?ross Profit
1 21&000&000 2 380&000 213,&800
, 1&500&000 910&000 ,,4&800
/ 1&930&000 1&,45&000 /1<&800
5 ,&455&000 1&4</&300 558&900
21&185&500
Offer III
(uture value of an annuity ue (Appeni! C"
9 years K semiannually
9-//
Chapter 09: Time Value of Money
C ) 1< + 1 ) 19
7 ) 1,;L, ) 3;
(V
7(A
) //.430 K 1 ) /,.430 (usin# Appeni! C"
A 7(A
(V A (V
2<0& 000 /,.430
2,& 3,0&<00 Value of trust fun after 9 years
=
=
=
*resent value of trust fun (Appeni! $"
7(
*V (V *V (1,;& 9 years"
2,&3,0&<00 ./31 2953&109
=
= =
CP 9$%& (Continued#
'ummary
Value of Dffer 7 21&090&/01
Value of Dffer 77 21&185&,80
Value of Dffer 777 2 953&109
:ele't Dffer 77.
9-/5