CHAPTER 5 PROBLEMS

THE TIME VALUE OF MONEY

PROBLEM 5-1
COMPOUND INTEREST
A)
Invest
Years
Percent
FV =
B)
Invest
Years
Percent
FV =
C)
Invest
Years
Percent
FV =
D)
Invest
Years
Percent
FV =

5,000
10
10%

8,000
7
8%

775
12
12%

21,000
5
5%

PROBLEM 5-2
COMPOUND VALUE SOLVING FOR N
A)
Invest
FV
Percent

500
1,039.50
5%

Page 1

N=
B)
Invest
FV
Percent
N=
C)
Invest
FV
Percent
N=
D)
Invest
FV
Percent
N=

35
53.87
9%

100
298.60
20%

53
78.76
2%

PROBLEM 5-3
COMPOUND VALUE SOLVING FOR r
A)
Invest
FV
Years
i=
B)
Invest
FV
Years

500
1,948.00
12

300
422.10
7

Page 2

i=
C)
Invest
FV
Years
i=
D)
Invest
FV
Years
i=

50
280.20
20

200
497.60
5

PROBLEM 5-4
PRESENT VALUE
A)
FV
Years
Percent
PV =
B)
FV
Years
Percent
PV =
C)
FV
Years
Percent
PV =
D)
FV
Years
Percent
PV =

800
10
10%

300
5
5%

1,000
8
3%

1,000
8
20%

Page 3

PROBLEM 5-5
COMPOUND VALUE
DATA
PV
Percent
A)

10,000
6%
1
5
15

B)
Percent

8%
1
5
15

PROBLEM 5-6
FUTURE VALUE
A)
FV
Years
Percent
PV =
B)
FV
Years
Percent
PV =

2,000,000
35
4%

2,000,000
35
14%

PROBLEM 5-7
FUTURE VALUE
DATA
Copies
Percent
Years'
FV for 1st yr =
FV for 2nd yr =
FV for 3rd yr =

15,000
20%
3

Page 4

10%

PROBLEM 5-8
FUTURE VALUE
DATA
Percent
Home runs
Years
FV for 1st yr =
FV for 2nd yr =
FV for 3rd yr =
FV for 4th yr =
FV for 5th yr =

12%
47
5

PROBLEM 5-9
SOLVING FOR r IN COMPOUND INTEREST
DATA
FV
PV
Years
Rate =

1,079.50
500
10

Page 5

PROBLEM 5-10
SOLVING FOR r IN COMPOUND INTEREST
DATA
PV
FV
Years
Interest =

10,000
27,027
5

PROBLEM 5-11
PRESENT-VALUE COMPARISON
Percent
A
B
C

11%
Years
Today
12
25

Amount

PV
1,000
10,000
25,000

PROBLEM 5-12
SOLVING FOR r IN COMPOUND INTEREST-FINANCIAL CALCULATOR NEEDED
Original Cost
No. of years lapsed
Present Cost
Rate of return =

0.12
50
33,000

PROBLEM 5-13
COMPOUNDING USING A CALCULATOR
DATA
N
I/Y
PV
PMT
CPT FV
N
I/Y
PMT
FV
CPT PV

6
3%
(15,000)
0

6
7.5%
0
$17,910.78

Page 6

This Problem cannot be solved by

using the finance function in Excel.
The solution can be found by
using Goal Seek.

PROBLEM 5-14
COMPOUNDING USING A CALCULATOR
DATA
N
I/Y
PV
FV
CPT PMT

45
8.75%
0
$1,000,000

PROBLEM 5-15
FUTURE VALUE
DATA
N
I/Y
PV
PMT
CPT FV

200
4%
(12,345)
0

PROBLEM 5-16
SOLVING FOR r
DATA
N
PV
PMT
FV
CPT I/Y

7
(4,510)
0
12,000

PROBLEM 5-17
SOLVING FOR N
DATA
I/Y
PV
PMT
FV
CPT N

4.5%
(45,530)
0
330,000

PROBLEM 5-18

Page 7

PRESENT VALUE
DATA
I/Y
PMT
FV
N
CPT PV

7.0%
0
398,930
28

PROBLEM 5-19
FUTURE VALUE
Years to retirement =
Annual return =
Selma saves for first # years =
Selma saves/year =
Patty saves for # years =
Selma
Payment/year =
(F/A, i, n) = (F/A, 8%, 10) =
FV at t=10 =
(1+i)n = (1.08)25 =
FV at t=35 =
Patty
Payment/year =
(F/A, i, n) = (F/A, 8%, 25) =
FV at t=35 =

35
8%
10
$2,000
25

t=1 through t=10

(Patty, too)
t=11 through t=35

$2,000
14.4866
$28,973.12
1.0000

$2,000
73.1059

PROBLEM 5-20
COMPOUND ANNUITY
A)
Pymt
Years
Percent
FV =
B)
Pymt
Years
Percent

500
10
5%

100
5
10%
Page 8

FV =
C)
Pymt
Years
Percent
FV =
D)
Pymt
Years
Percent
FV =

35
7
7%

25
3
2%

PROBLEM 5-21
PRESENT VALUE OF AN ANNUITY
A)
Invest
Years
Percent
PV =
B)
Invest
Years
Percent
PV =
C)
Invest
Years
Percent
PV =
D)
Invest
Years
Percent
PV =

2,500
10
7%

70
3
3%

280
7
6%

500
10
10%

PROBLEM 5-22
SOLVING FOR r WITH ANNUITIES
DATA
Rate =
Annuity

11%
First Pymt

Rec per Yr

Page 9

Years

A
B
C

50,000
60,000
70,000

8,500
7,000
8,000

PROBLEM 5-23
LOAN AMORTIZATION
DATA
PV
Down payment
Years
Percents
Pymts =

80,000
20,000
25
9%

PROBLEM 5-24
SOLVING FOR PMT OF AN ANNUITY
DATA
FV
Years
Percent
Pymts =

15,000
15
6%

PROBLEM 5-25
FUTURE VALUE OF AN ANNUITY
DATA
Years
Pv
Percent

10
100,000
5%

FV =
Percent
Pymt =

10%

PROBLEM 5-26
COMPOUND VALUE
DATA
FV
Years
Percent

10,000,000
10
9%

Page 10

12
25
20

Pymt =
PROBLEM 5-27
LOAN AMORTIZATION
DATA
PV
Down payment
Installments
Percent

50,000
10,000
10
10%

Pymts =
PROBLEM 5-28
SOLVING FOR r OF AN ANNUITY
DATA
PV
pymt
Installments
Percent =

30,000
10,000
5

PROBLEM 5-29
LOAN AMORTIZATION
DATA
PV
Percent
Years
Pymts =

25,000
12%
5

PROBLEM 5-30
COMPOUND ANNUITY
DATA
Years
FV
Percent
Pymt =

5
20,000
12%

PROBLEM 5-31
LOAN AMORTIZATION

Page 11

DATA
No. of payments
Interest rate
Amount borrowed

20
15%
100,000

Annual Payments
PROBLEM 5-32
LOAN AMORTIZATION
DATA
No. of payments
Interest rate
Amount borrowed

30
10%
150,000

Annual Payments
PROBLEM 5-33
SPREADSHEET PROBLEM
DATA
PV
Interest rate
Payment
Years
Future value =

900
8%
0%
7

PROBLEM 5-34
SPREADSHEET PROBLEM
DATA
PV
FV
Years
RATE =

30,000
250,000.00
20

PROBLEM 5-35
COMPOUNDING USING A CALCULATOR AND ANNUITIES DUE
DATA
N

10

Page 12

I/Y
PMT
FV
CPT PV

20%
$1,000,000,000
0
(4,192,472,085.55)

N
I/Y
PV
CPT PMT

20
20%
0

PROBLEM 5-36
COMPOUNDING USING A CALCULATOR AND ANNUITIES DUE
DATA
N
I/Y
PV
PMT
CPT FV =

25
7.5%
(100,000)
0

N
I/Y
PV
PMT
CPT FV =

20
7.5%
0
(1,500)
64,957.02

TOTAL =
PROBLEM 5-37
SOLVING FOR r IN AN ANNUITY
DATA
N
PV
PMT
FV
CPT I/Y =

20
(21,074)
3,000
0

PROBLEM 5-38
COMPOUND INTEREST WITH NONANNUAL PERIODS

Page 13

A)
PV
Years
Percent
FV =
B)
Semiannual
Bimonthly
C)
Rate
Annual
Semiannual
Bimonthly
D)
Years
Annual

5,000
5
6%

2
6
12%

12

PROBLEM 5-39
COMPOUND INTEREST WITH NONANNUAL PERIODS
Finance Co.
Percent
Compound
Bank:
Percent
Invest
Year

12%
12
13%
1
1

PROBLEM 5-40
SOLVING FOR N WITH NONANNUAL PERIODS
DATA
PV
Interest
FV
Compound
Years
Semiannual Periods

1
16%
4
2
9

PROBLEM 5-41
SPREADSHEET PROBLEM

Page 14

DATA
PV
Monthly
Years
Percent
Pymts =

300,000
12
25
8%

Period
Interest portion of payment
Principal portion of payment

48

PROBLEM 5-42
NONANNUAL COMPOUNDING USING A CALCULATOR
DATA
N
I/Y
PV
FV
CPT PMT

60
0.52%
(25,000)
0

PROBLEM 5-43
NONANNUAL COMPOUNDING USING A CALCULATOR
DATA
N
PV
PMT
FV
CPT I/Y =
ANNUAL I/Y =

36
(999)
33
0
0.97%

PROBLEM 5-44
NONANNUAL COMPOUNDING USING A CALCULATOR
DATA
N
I/Y
PV
FV
CPT PMT

60
0.4%
(25,000)
0

Page 15

N
I/Y
PV
FV
CPT PMT

60
0.6%
(24,000)
0

PROBLEM 5-45
NONANNUAL COMPOUNDING USING A CALCULATOR
DATA
N
I/Y
PV
PMT
CPT FV =

16
1.6%
0
(1,000)

PROBLEM 5-46
NONANNUAL COMPOUNDING USING A CALCULATOR
DATA
I/Y
PV
PMT
FV
CPT N =

1.1%
(5,000)
150
0

PROBLEM 5-47
NONANNUAL COMPOUNDING USING A CALCULATOR
DATA
A)
N
PV
PMT
FV
CPT I/Y =
B)
N
PV
PMT

12
(160,000)
0
420,000

10
(140,000)
0

Page 16

FV
CPT I/Y =

420,000

C)
N
I/Y
PV
FV
CPT PMT

120
0.5%
(140,000)
420,000

D)
N
PV
PMT
FV
CPT I/Y =
ANNUAL I/Y =

120
(140,000)
(500)
420,000
0.71%

PROBLEM 5-48
PRESENT VALUE OF AN UNEVEN STREAM OF PAYMENTS
DATA
Percent
Years

20%
1
2
3
4
5
6
7
8
9
10

Total PV

A
10,000
10,000
10,000
10,000
10,000

C
10,000

10,000
10,000
10,000
10,000
10,000
10,000
33,255

PROBLEM 5-49
PRESENT VALUE

Page 17

50,000

10,000
8,333
16,745
1,615

DATA
FV
Years
Percent
PV =

1,000
7
10%

PROBLEM 5-50
PERPETUITIES
A)
Perpetuity
Percent
PV =
B)
Perpetuity
Percent
PV =
C)
Perpetuity
Percent
PV =
D)
Perpetuity
Percent
PV =

300
8%

1,000
12%

100
9%

95
5%

PROBLEM 5-51
COMPLEX PRESENT VALUE
DATA
Annuity
Years
Beginning
Add pymt
Percent
PV of 10,000 Annuity =
Step 1
Step 2

(42,123.64)
23,521.62

PV of Additional pymt =

8,345.30

10,000
5
10
20,000
6%

Deposit Today

Page 18

PROBLEM 5-52
COMPLEX PRESENT VALUE
DATA
FV
Years
Percent
A)
Payment =
B)
PV =
C)
Deposit
years
FV =
Remaining balance=
Payment =

50,000
15
7%

10,000
10
50,000.00

PROBLEM 5-53
COMPREHENSIVE PRESENT VALUE
DATA
Years
Savings
Stocks
Depositing:
Years
Annuity
Years
Annuity
A)
Percent:
Savings
Stocks
1)
FV =
2)
FV =
3)
FV of dep =
4)

10
100,000
300,000
5
10,000
5
20,000

7%
12%
196,715.14
931,754.46
138,164.48

Page 19

FV =

57,507.39

Total FV =
B)
Percent
Years
Annuity =

10%
20

PROBLEM 5-54
PRESENT VALUE
DATA
Discount rate
Amount per payment
No. of Payments without
current year's payment

10%
50,000
19

Present value
DATA
Discount rate
Amount per payment
No. of Payments without
current year's payment

20%
50,000
19

Present value
PROBLEM 5-55
COMPLEX ANNUITY
DATA
N
I/Y
PV
PMT
CPT FV =
B)
N
I/Y
PV
PMT

140
2.25%
0
(300)

60
2.25%
(20,000)
0

Page 20

CPT FV =
TOTAL =
PROBLEM 5-56
COMPLEX ANNUITY AND FUTURE VALUE
DATA
N
I/Y
PMT
FV
CPT PV
BOAT

50
6%
80,000
0
(1,260,949)
$300,000.00

N
I/Y
PV
FV
CPT PMT

43
9.0%
0
1,560,949

PROBLEM 5-57
PRESENT VALUE OF A COMPLEX STREAM
Years for initial annuity =
Annual return =
Amount/Year =
Extra at t=6 =

6
8%
$80,000
$100,000

Amount/Year =
(P/A, i, n) = (P/A, 8%, 6) =
PV(annuity) =
Extra payment =
1/(1+i)n = 1/(1.08)6 =
PV(lump sum) =
Total PV of all CFs =

$80,000
4.6229
$369,830.37
$100,000.00

at t=6

0.6302
$63,016.96

PROBLEM 5-58
PRESENT VALUE OF A COMPLEX STREAM
Years for initial annuity =

Page 21

BEGINNING OF YEAR: t=0 through t=5

Annual return =
Amount/Year =
Extra at t=6 =

8%
$80,000
$100,000

Amount/Year =
(P/A, i, n) = (P/A, 8%, 6) =
(1+i)n = (1.08)1 =
PV(annuity) =
Extra payment =
1/(1+i)n = 1/(1.08)6 =
PV(lump sum) =
Total PV of all CFs =

$80,000
4.6229

at t=-1

1.0800
$399,416.80
$100,000.00

at t=0
at t=6

0.6302
$63,016.96

PROBLEM 5-59
COMPLEX STREAM OF CASH FLOWS
Loan amount =
Annual rate =
Term of loan (years) =
m=
Balloon payment at end of yr 5 =

$2,000,000
7%
5
12
$500,000

(a)

payments made monthly

EPR =
0.5833%
# of monthly payments =
60
PV of balloon payment =
$352,702.52
Amount to pay off with monthly payments $=1,647,297.48
(P/A,i, n) = (P/A, 7%/12, 5*12) =
50.5020
Monthly payment =

(b)
(a) - (b)

PROBLEM 5-60
FUTURE AND PRESENT VALUE USING A CALCULATOR
DATA
A)
N
I/Y
PV
PMT
CPT FV =
B)
N

387
6%
-24
0

4,644
Page 22

at 7%:

I/Y
PV
PMT
CPT FV =

0.50%
-24
0

C)
N
I/Y
FV
PMT
CPT PV =

10
10%
($60,000,000,000)
0

D)
N
PV
PMT
FV
CPT I/Y =

10
(15,000,000,000)
0
60,000,000,000

E)
N
I/Y
PV
FV
CPT PMT =

40
7%
(28,000,000,000)
0

MINI CASE
C)
1)
PV=
i=
n=
FV=

5,000
8%
10

FV=
PV=
i=
n=

1,671
400
10%

FV=
PV=

4,046
1,000

2)

3)

Page 23

n=
i=

10

D)
PV=
i=
n=
FV=

1,000
10%
5

PMT=
i=
n=
PV=
PV(a.d.)=

1,000
10%
7

PMT=
i=
n=
FV=
FV(a.d.)=

1,000
10%
7

PV=
i=
n=
PMT=

100,000
10%
25

PP=
i=
PV=

1,000
8%

PMT=
i=
n=
n=
PV=

1,000
10%
10
9
6,144.57

PP=
i=
n=
PV=

1,000
10%
9
10,000.00

F)

G)

H)

I)

J)

K)

Page 24

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R: t=0 through t=5

Page 45

$356,493.09
$1,643,506.91
$32,543.41

Page 46