166GitmanPrinciplesofFinance,EleventhEdition

Chapter4
TimeValueofMoney
.1

Learning Goals

1.

Discusstheroleoftimevalueinfinance,theuseofcomputationalaids,andthebasicpatternsof
cashflow.

2.

Understandtheconceptoffuturevalueandpresentvalue,theircalculationforsingleamounts,and
therelationshipbetweenthem.

3.

Findthefuturevalueandthepresentvalueofbothanordinaryannuityandanannuitydue,andthe
presentvalueofaperpetuity.

4.

Calculateboththefuturevalueandthepresentvalueofamixedstreamofcashflows.

5.

Understandtheeffectthatcompoundinginterestmorefrequentlythanannuallyhasonfuturevalue
andtheeffectiveannualrateofinterest.

6.

Describetheproceduresinvolvedin(1)determiningdepositsneededtoaccumulatetoafuturesum,
(2)loanamortization,(3)findinginterestorgrowthrates,and(4)findinganunknownnumberof
periods.

.2

True/False Questions

1.

Sinceindividualsarealwaysconfrontedwithopportunitiestoearnpositiveratesofreturnontheir
funds,thetimingofcashflowsdoesnothaveanysignificanteconomicconsequences.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:RoleofTimeValueinFinance

2.

Timevalueofmoneyisbasedonthebeliefthatadollarthatwillbereceivedatsomefuturedateis
worthmorethanadollartoday.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:RoleofTimeValueinFinance

3.

Futurevalueisthevalueofafutureamountatthepresenttime,foundbyapplyingcompound
interestoveraspecifiedperiodoftime.

167GitmanPrinciplesofFinance,EleventhEdition

Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:FutureValue
4.

Interestearnedonagivendepositthathasbecomepartoftheprincipalattheendofaspecified
periodiscalledcompoundinterest.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:CompoundInterest

5.

Thefuturevalueinterestfactoristhefuturevalueof$1perperiodcompoundedatipercentforn
periods.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue

6.

Foragiveninterestrate,thefuturevalueof$100increaseswiththepassageoftime.Thus,the
longertheperiodoftime,thegreaterthefuturevalue.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue

7.

Thegreaterthepotentialreturnonaninvestmentandthelongertheperiodoftime,thehigherthe
presentvalue.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:2
Topic:PresentValue

8.

Everythingelsebeingequal,thehighertheinterestrate,thehigherthefuturevalue.
Answer: TRUE
LevelofDifficulty:2

Chapter4TimeValueofMoney168

LearningGoal:2
Topic:FutureValue
9.

Thefuturevalueincreaseswithincreasesintheinterestrateortheperiodoftimefundsarelefton
deposit.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:FutureValue

10.

Everythingelsebeingequal,thehigherthediscountrate,thehigherthepresentvalue.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:PresentValue

11.

Everythingelsebeingequal,thelongertheperiodoftime,thelowerthepresentvalue.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:PresentValue

12.

Thepresentvalueinterestfactorforipercentandnperiodsistheinverseofthefuturevalueinterest
factorforkpercentandnperiods.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:PresentValue

13.

Givenadiscountrateofzeropercentandnperiodsoftime,thepresentvalueinterestfactorand
futurevalueinterestfactorareequal.
Answer: TRUE

169GitmanPrinciplesofFinance,EleventhEdition

LevelofDifficulty:2
LearningGoal:2
Topic:PresentValue
14.

Annuitydueisanamountthatoccursatthebeginningofeachperiod.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:3
Topic:Annuities

15.

FutureValueInterestFactorAnnuity(FVIFA)isthefuturevalueof$1ordinaryannuityfornperiod
compoundedatkpercent.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:3
Topic:FutureValueofanAnnuity

16.

Theordinaryannuityisanannuityforwhichthecashflowoccursatthebeginningofeachperiod.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
Topic:Annuities

17.

Thefuturevalueofanannuitydueisalwaysgreaterthanthefuturevalueofanotherwiseidentical
ordinaryannuity.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuityDue

18.

Thenominal(stated)annualrateistherateofinterestactuallypaidorearned.

Chapter4TimeValueofMoney170

Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates
19.

Thenominalandeffectiveratesareequivalentforannualcompounding.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

20.

Theeffectiveannualrateincreaseswithincreasingcompoundingfrequency.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

21.

Theannualpercentagerate(APR)isthenominalrateofinterest,foundbymultiplyingtheperiodic
ratebythenumberofperiodsinoneyear.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

22.

Theannualpercentageyield(APY)istheeffectiverateofinterestthatmustbedisclosedto
customersbybanksontheirsavingsproductsasaresultoftruthinsavingslaws.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

171GitmanPrinciplesofFinance,EleventhEdition

23.

Theeffectiverateofinterestisthecontractualrateofinterestchargedbyalenderorpromisedbya
borrower.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

24.

Theeffectiverateofinterestdiffersfromthenominalrateofinterestinthatitreflectstheimpactof
compoundingfrequency.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

25.

Foranyinterestrateandforanyperiodoftime,themorefrequentlyinterestiscompounded,the
greatertheamountofmoneythathastobeinvestedtodayinordertoaccumulateagivenfuture
amount.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

26.

Theeffectiverateofinterestandcompoundingfrequencyareinverselyrelated.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
Topic:NominalandEffectiveInterestRates

Chapter4TimeValueofMoney172

27.

Theloanamortizationprocessinvolvesfindingthefuturepayments(overthetermoftheloan)
whosepresentvalueattheloaninterestrateequalsthesumoftheamountofinitialprincipal
borrowedandtheamountofinterestontheloan.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:LoanAmortization

28.

Ingeneral,withanamortizedloan,thepaymentamountremainsconstantoverthelifeoftheloan,
theprincipalportionofeachpaymentgrowsoverthelifeoftheloan,andtheinterestportionofeach
paymentdeclinesoverthelifeoftheloan.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:6
Topic:LoanAmortization

29.

Ingeneral,withanamortizedloan,thepaymentamountremainsconstantoverthelifeoftheloan,
theprincipalportionofeachpaymentgrowsoverthelifeoftheloan,andtheinterestportionofeach
paymentgrowsoverthelifeoftheloan.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:LoanAmortization

30.

Ingeneral,withanamortizedloan,thepaymentamountremainsconstantoverthelifeoftheloan,
theprincipalportionofeachpaymentdeclinesoverthelifeoftheloan,andtheinterestportion
declinesoverthelifeoftheloan.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:LoanAmortization

31.

Ingeneral,withanamortizedloan,thepaymentamountgrowsoverthelifeoftheloan,theprincipal
portionofeachpaymentgrowsoverthelifeoftheloan,andtheinterestportiondeclinesoverthe
lifeoftheloan.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:LoanAmortization

32.

Whencomputinganinterestorgrowthrate,theratewillincreasethelargerthefuturevalue,holding
presentvalueandthenumberofperiodsconstant.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:6
Topic:InterestorGrowthRates

173GitmanPrinciplesofFinance,EleventhEdition

33.

Whencomputinganinterestorgrowthrate,theratewilldecreasethelargerthefuturevalue,holding
presentvalueandthenumberofperiodsconstant.

Chapter4TimeValueofMoney174

Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:InterestorGrowthRates
34.

Whencomputinganinterestorgrowthrate,theratewillincreasethesmallerthefuturevalue,
holdingpresentvalueandthenumberofperiodsconstant.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:InterestorGrowthRates

35.

Whencomputingthenumberofdepositsneededtoaccumulatetoafuturesum,itwilltakelonger
thelowertheinterestrate,holdingthefuturevalueanddepositsizeconstant.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:6
Topic:DepositsNeededtoAccumulateaFutureSum

36.

Whencomputingthenumberofdepositsneededtoaccumulatetoafuturesum,itwilltakelonger
thehighertheinterestrate,holdingthefuturevalueanddepositsizeconstant.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:6
Topic:DepositsNeededtoAccumulateaFutureSum

.3

Multiple Choice Questions

1.

Infuturevalueorpresentvalueproblems,unlessstatedotherwise,cashflowsareassumedtobe
(a) attheendofatimeperiod.
(b) atthebeginningofatimeperiod.

175GitmanPrinciplesofFinance,EleventhEdition

(c) inthemiddleofatimeperiod.
(d) spreadoutevenlyoveratimeperiod.
Answer: A
LevelofDifficulty:1
LearningGoal:1
Topic:BasicTimeValueConcepts
2.

Whentheamountearnedonadeposithasbecomepartoftheprincipalattheendofaspecifiedtime
periodtheconceptiscalled
(a) discountinterest.
(b) compoundinterest.
(c) primaryinterest.
(d) futurevalue.
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:BasicTimeValueConcepts

3.

Thefuturevalueinterestfactoris
(a) alwaysgreaterthan1.0.
(b) sometimesnegative.
(c) alwayslessthan0.
(d) nevergreaterthan25.
Answer: A
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.5)

Chapter4TimeValueofMoney176

4.

Thefuturevalueof$100receivedtodayanddepositedat6percentforfouryearsis
(a) $126.
(b) $79.
(c) $124.
(d) $116.
Answer: A
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,4.6)

5.

Iftheinterestrateiszero,thefuturevalueinterestfactorequals_________.
(a) 1.0
(b) 0.0
(c) 1.0
(d) 2.0
Answer: C
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.5)

6.

Astheinterestrateincreasesforanygivenperiod,thefuturevalueinterestfactorwill
(a) decrease.
(b) increase.
(c) remainunchanged.
(d) movetoward1.
Answer: B

177GitmanPrinciplesofFinance,EleventhEdition

LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.5)
7.

Thefuturevalueof$200receivedtodayanddepositedat8percentforthreeyearsis
(a) $248.
(b) $252.
(c) $158.
(d) $200.
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,4.6)

8.

Thepresentvalueof$100tobereceived10yearsfromtoday,assuminganopportunitycostof
9percent,is
(a) $236.
(b) $699.
(c) $42.
(d) $75.
Answer: C
LevelofDifficulty:1
LearningGoal:2
Topic:PresentValue(Equation4.9,4.11,4.12)

9.

Theamountofmoneythatwouldhavetobeinvestedtodayatagiveninterestrateoveraspecified
periodinordertoequalafutureamountiscalled
(a) futurevalue.
(b) presentvalue.

Chapter4TimeValueofMoney178

(c) futurevalueinterestfactor.
(d) presentvalueinterestfactor.
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:PresentValue
10.

Thepresentvalueof$200tobereceived10yearsfromtoday,assuminganopportunitycostof
10percent,is
(a) $50.
(b) $200.
(c) $518.
(d) $77.
Answer: D
LevelofDifficulty:1
LearningGoal:2
Topic:PresentValue(Equation4.9,4.11,4.12)

11.

Thepresentvalueinterestfactoris
(a) between2.0and0.0.
(b) alwaysnegative.
(c) alwayslessthan1.0.
(d) adiscountrate.
Answer: C
LevelofDifficulty:1
LearningGoal:2
Topic:PresentValue(Equation4.11)

179GitmanPrinciplesofFinance,EleventhEdition

12.

Thefuturevalueofadollar_________astheinterestrateincreasesand_________thefartherin
thefutureaninitialdepositistobereceived.
(a) decreases;decreases
(b) decreases;increases
(c) increases;increases
(d) increases;decreases
Answer: C
LevelofDifficulty:2
LearningGoal:2
Topic:FutureValue

13.

Theannualrateofreturnisvariouslyreferredtoasthe
(a) discountrate.
(b) opportunitycost.
(c) costofcapital.
(d) alloftheabove.
Answer: D
LevelofDifficulty:2
LearningGoal:2
Topic:BasicTimeValueConcepts

14.

Ifthepresentvalueinterestfactorforipercentandnperiodsis0.270,thefuturevalueinterestfactor
forthesameiandnis
(a) 0.730.
(b) 3.797.
(c) 3.704.
(d) cannotbedetermined.
Answer: C
LevelofDifficulty:2
LearningGoal:2
Topic:BasicTimeValueConcepts(Equation4.5)

15.

Foragiveninterestrate,asthelengthoftimeuntilreceiptofthefundsincreases,thepresentvalue
interestfactor
(a) changesproportionally.
(b) increases.
(c) decreases.
(d) remainsunchanged.
Answer: C
LevelofDifficulty:2
LearningGoal:2
Topic:PresentValue(Equation4.11)

Chapter4TimeValueofMoney180

16.

Indicatewhichofthefollowingistrueaboutannuities.
(a) Anordinaryannuityisanequalpaymentpaidorreceivedatthebeginningofeachperiod.
(b) Anannuitydueisapaymentpaidorreceivedatthebeginningofeachperiodthatincreasesby
anequalamounteachperiod.
(c) Anannuitydueisanequalpaymentpaidorreceivedatthebeginningofeachperiod.
(d) Anordinaryannuityisanequalpaymentpaidorreceivedattheendofeachperiodthat
increasesbyanequalamounteachperiod.
Answer: C
LevelofDifficulty:1
LearningGoal:3
Topic:Annuities

17.

Indicatewhichformulaiscorrecttodeterminethefuturevalueofanannuitydue.
(a)
(b)
(c)
(d)

FVAsPMTFVIFAi,n
FVAsPMT[FVIFAi,n(1i)]
FVAsPMT[FVIFAi,n/(1i)]
FVAsPMTFVIFAi,n1

Answer: B
LevelofDifficulty:1
LearningGoal:3
Topic:FutureValueofanAnnuity(Equation4.17)
18.

Thepresentvalueofa$25,000perpetuityata14percentdiscountrateis
(a) $178,571.
(b) $285,000.
(c) $350,000.
(d) $219,298.
Answer: A
LevelofDifficulty:1
LearningGoal:3
Topic:Perpetuities(Equation4.19)

19.

Anannuitywithaninfinitelifeiscalleda(n)
(a) perpetuity.
(b) primia.
(c) indefinite.
(d) deepdiscount.
Answer: A
LevelofDifficulty:1
LearningGoal:3
Topic:Perpetuities

181GitmanPrinciplesofFinance,EleventhEdition

20.

Thepresentvalueofa$20,000perpetuityata7percentdiscountrateis
(a) $186,915.
(b) $285,714.
(c) $140,000.
(d) $325,000.
Answer: B
LevelofDifficulty:1
LearningGoal:3
Topic:Perpetuities(Equation4.19)

21.

_________isanannuitywithaninfinitelifemakingcontinualannualpayments.
(a) Anamortizedloan
(b) Aprincipal
(c) Aperpetuity
(d) AnAPR
Answer: C
LevelofDifficulty:1
LearningGoal:3
Topic:Perpetuities

22.

Billplanstofundhisindividualretirementaccount(IRA)withthemaximumcontributionof$2,000
attheendofeachyearforthenext20years.IfBillcanearn12percentonhiscontributions,how
muchwillhehaveattheendofthetwentiethyear?
(a) $19,292
(b) $14,938
(c) $40,000
(d) $144,104
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

23.

Danplanstofundhisindividualretirementaccount(IRA)withthemaximumcontributionof$2,000
attheendofeachyearforthenext10years.IfDancanearn10percentonhiscontributions,how
muchwillhehaveattheendofthetenthyear?
(a) $12,290
(b) $20,000
(c) $31,874
(d) $51,880
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

Chapter4TimeValueofMoney182

24.

Incomparinganordinaryannuityandanannuitydue,whichofthefollowingistrue?
(a) Thefuturevalueofanannuitydueisalwaysgreaterthanthefuturevalueofanotherwise
identicalordinaryannuity.
(b) Thefuturevalueofanordinaryannuityisalwaysgreaterthanthefuturevalueofanotherwise
identicalannuitydue.
(c) Thefuturevalueofanannuitydueisalwayslessthanthefuturevalueofanotherwiseidentical
ordinaryannuity,sinceonelesspaymentisreceivedwithanannuitydue.
(d) Allthingsbeingequal,onewouldprefertoreceiveanordinaryannuitycomparedtoanannuity
due.
Answer: A
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuityDue

25.

Thefuturevalueofa$2,000annuityduedepositedat8percentcompoundedannuallyforeachof
thenext10yearsis
(a) $28,974.
(b) $31,292.
(c) $14,494.
(d) $13,420.
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuityDue(Equation4.17)

26.

Thefuturevalueofa$10,000annuityduedepositedat12percentcompoundedannuallyforeachof
thenext5yearsis
(a) $36,050.
(b) $63,530.
(c) $40,376.
(d) $71,154.
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuityDue(Equation4.17)

27.

Thefuturevalueofanordinaryannuityof$1,000eachyearfor10years,depositedat3percent,is
(a) $11,808.
(b) $11,464.
(c) $8,530.
(d) $10,000.
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

183GitmanPrinciplesofFinance,EleventhEdition

28.

Thefuturevalueofanordinaryannuityof$2,000eachyearfor10years,depositedat12percent,is
(a) $35,098.
(b) $20,000.
(c) $39,310.
(d) $11,300.
Answer: A
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

29.

Acollegereceivedacontributiontoitsendowmentfundof$2million.Theycannevertouchthe
principal,buttheycanusetheearnings.Atanassumedinterestrateof9.5percent,howmuchcan
thecollegeearntohelpitsoperationseachyear?
(a) $95,000
(b) $19,000
(c) $190,000
(d) $18,000
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:Perpetuities(Equation4.19)

30.

Ifthepresentvalueofaperpetualincomestreamisincreasing,thediscountratemustbe
(a) increasing.
(b) decreasing.
(c) changingunpredictably.
(d) increasingproportionally.
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:Perpetuities

31.

Thepresentvalueofanordinaryannuityof$350eachyearforfiveyears,assuminganopportunity
costof4percent,is
(a) $288.
(b) $1,896.
(c) $1,750.
(d) $1,558.
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

Chapter4TimeValueofMoney184

32.

Thepresentvalueofanordinaryannuityof$2,350eachyearforeightyears,assumingan
opportunitycostof11percent,is
(a) $1,020.
(b) $27,869.
(c) $18,800.
(d) $12,093.
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

33.

Agenerousbenefactortothelocalballetplanstomakeaonetimeendowmentwhichwouldprovide
theballetwith$150,000peryearintoperpetuity.Therateofinterestisexpectedtobe5percentfor
allfuturetimeperiods.Howlargemusttheendowmentbe?
(a) $300,000
(b) $3,000,000
(c) $750,000
(d) $1,428,571
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:Perpetuities(Equation4.19)

34.

Agenerousphilanthropistplanstomakeaonetimeendowmenttoarenownedheartresearchcenter
whichwouldprovidethefacilitywith$250,000peryearintoperpetuity.Therateofinterestis
expectedtobe8percentforallfuturetimeperiods.Howlargemusttheendowmentbe?
(a) $2,314,814
(b) $2,000,000
(c) $3,125,000
(d) $3,000,000
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:Perpetuities(Equation4.19)

35.

Marywillreceive$12,000peryearforthenext10yearsasroyaltyforherworkonafinancebook.
Whatisthepresentvalueofherroyaltyincomeiftheopportunitycostis12percent?
(a) $120,000
(b) $67,800
(c) $38,640
(d) Noneoftheabove.
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

185GitmanPrinciplesofFinance,EleventhEdition

36.

Topayforhercollegeeducation,Ginaissaving$2,000atthebeginningofeachyearforthenext
eightyearsinabankaccountpaying12percentinterest.HowmuchwillGinahaveinthataccount
attheendof8thyear?
(a) $16,000
(b) $17,920
(c) $24,600
(d) $27,552
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuityDue(Equation4.17)

37.

Jamesplanstofundhisindividualretirementaccount,beginningtoday,with20annualdepositsof
$2,000,whichhewillcontinueforthenext20years.Ifhecanearnanannualcompoundrateof
8percentonhisdeposits,theamountintheaccountuponretirementwillbe
(a) $19,636.
(b) $91,524.
(c) $98,846.
(d) $21,207.
Answer: C
LevelofDifficulty:3
LearningGoal:3
Topic:FutureValueofanAnnuityDue(Equation4.17)

38.

Youhavebeenofferedaprojectpaying$300atthebeginningofeachyearforthenext20years.
Whatisthemaximumamountofmoneyyouwouldinvestinthisprojectifyouexpect9percentrate
ofreturntoyourinvestment?
(a) $2,738.70
(b) $2,985.18
(c) $15,347.70
(d) $6,000.00
Answer: B
LevelofDifficulty:3
LearningGoal:3
Topic:PresentValueofanAnnuityDue(Equation4.18)

39.

$100isreceivedatthebeginningofyear1,$200isreceivedatthebeginningofyear2,and$300is
receivedatthebeginningofyear3.Ifthesecashflowsaredepositedat12percent,theircombined
futurevalueattheendofyear3is_________.
(a) $1,536
(b) $672
(c) $727
(d) $1,245
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.4,4.5,4.6)

Chapter4TimeValueofMoney186

40.

$1,200isreceivedatthebeginningofyear1,$2,200isreceivedatthebeginningofyear2,and
$3,300isreceivedatthebeginningofyear3.Ifthesecashflowsaredepositedat12percent,their
combinedfuturevalueattheendofyear3is_________.
(a) $6,700
(b) $17,000
(c) $12,510
(d) $8,141
Answer: D
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.4,4.5,4.6)

41.

Findthefuturevalueattheendofyear3ofthefollowingstreamofcashflowsreceivedattheendof
eachyear,assumingthefirmcanearn17percentonitsinvestments.
Year
1
2
3
(a)
(b)
(c)
(d)

Amount
$3,000
6,000
9,000

$20,724
$20,127
$23,550
$23,350

Answer: B
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.4,4.5,4.6)
42.

Findthefuturevalueattheendofyear3ofthefollowingstreamofcashflowsreceivedattheendof
eachyear,assumingthefirmcanearn8percentonitsinvestments.
Year
1
2
3
(a)
(b)
(c)
(d)

Amount
$10,000
16,000
19,000

$45,000
$53,396
$47,940
$56,690

Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.4,4.5,4.6)

187GitmanPrinciplesofFinance,EleventhEdition

43.

Thepresentvalueof$1,000receivedattheendofyear1,$1,200receivedattheendofyear2,and
$1,300receivedattheendofyear3,assuminganopportunitycostof7percent,is
(a) $2,500.
(b) $3,043.
(c) $6,516.
(d) $2,856.
Answer: B
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)

44.

Thepresentvalueof$100receivedattheendofyear1,$200receivedattheendofyear2,and$300
receivedattheendofyear3,assuminganopportunitycostof13percent,is
(a) $453.
(b) $416.
(c) $1,181.
(d) $500.
Answer: A
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)

45.

Findthepresentvalueofthefollowingstreamofcashflows,assumingthatthefirmsopportunity
costis14percent.
Year
1
2
3
(a)
(b)
(c)
(d)

Amount
$10,000
35,000
24,000

$121,256
$69,000
$60,513
$51,885

Answer: D
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)

Chapter4TimeValueofMoney188

46.

Findthepresentvalueofthefollowingstreamofcashflows,assumingthatthefirmsopportunity
costis25percent.
Year
1
2
3
(a)
(b)
(c)
(d)

Amount
$5,000
25,000
14,000

$27,168
$35,200
$34,000
$32,500

Answer: A
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)
47.

Findthepresentvalueofthefollowingstreamofcashflows,assumingthatthefirmsopportunity
costis9percent.
Year
15
610
(a)
(b)
(c)
(d)

Amount
$10,000/yr.
16,000/yr.

$13,252
$141,588
$10,972
$79,348

Answer: D
LevelofDifficulty:4
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12,4.15,4.16)
48.

Findthepresentvalueofthefollowingstreamofcashflows,assumingthatthefirmsopportunity
costis14percent.
Year
15
610

Amount
$20,000/yr.
35,000/yr.

189GitmanPrinciplesofFinance,EleventhEdition

(a)
(b)
(c)
(d)

$131,065
$19,830
$14,850
$120,820

Answer: A
LevelofDifficulty:4
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12,4.15,4.16)
49.

Therateofinterestagreeduponcontractuallychargedbyalenderorpromisedbyaborroweristhe
_________interestrate.
(a) effective
(b) nominal
(c) discounted
(d) continuous
Answer: B
LevelofDifficulty:1
LearningGoal:5
Topic:NominalandEffectiveInterestRates

50.

Therateofinterestactuallypaidorearned,alsocalledtheannualpercentagerate(APR),isthe
_________interestrate.
(a) effective
(b) nominal
(c) discounted
(d) continuous
Answer: A
LevelofDifficulty:1
LearningGoal:5
Topic:NominalandEffectiveInterestRates

51.

Thefuturevalueof$200receivedtodayanddepositedat8percentcompoundedsemiannuallyfor
threeyearsis
(a) $380.
(b) $158.
(c) $253.
(d) $252.
Answer: C
LevelofDifficulty:2
LearningGoal:5
Topic:FutureValue(Equation4.4,4.5,4.6)

52.

Thefuturevalueof$100receivedtodayanddepositedinanaccountforfouryearspaying
semiannualinterestof6percentis
(a) $450.
(b) $126.
(c) $889.

Chapter4TimeValueofMoney190

(d) $134.
Answer: B
LevelofDifficulty:2
LearningGoal:5
Topic:FutureValue(Equation4.4,4.5,4.6)

191GitmanPrinciplesofFinance,EleventhEdition

53.

Thefuturevalueof$200receivedtodayanddepositedforthreeyearsinanaccountwhichpays
semiannualinterestof8percentis_________.
(a) $253.00
(b) $252.00
(c) $158.00
(d) $134.66
Answer: A
LevelofDifficulty:2
LearningGoal:5
Topic:FutureValue(Equation4.4,4.5,4.6)

54.

Thefuturevalueofanannuityof$1,000eachyearfor10years,depositedat12percent
compoundedquarterlyis
(a) $17,549.
(b) $75,400.
(c) $93,049.
(d) $11,200.
Answer: B
LevelofDifficulty:2
LearningGoal:5
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

55.

Whatisthehighesteffectiverateattainablewitha12percentnominalrate?
(a) 12.00%
(b) 12.55%
(c) 12.75%
(d) 12.95%
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:NominalandEffectiveInterestRates(Equation4.23)

56.

Ginahasplannedtostarthercollegeeducationfouryearsfromnow.Topayforhercollege
education,shehasdecidedtosave$1,000aquarterforthenextfouryearsinabankaccountpaying
12percentinterest.Howmuchwillshehaveattheendofthefourthyear?
(a) $1,574
(b) $19,116
(c) $20,157
(d) $16,000
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

Chapter4TimeValueofMoney192

57.

Thetimevalueconcept/calculationusedinamortizingaloanis
(a) futurevalueofadollar.
(b) futurevalueofanannuity.
(c) presentvalueofadollar.
(d) presentvalueofanannuity.
Answer: D
LevelofDifficulty:1
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)

58.

IfaUnitedStatesSavingsbondcanbepurchasedfor$29.50andhasamaturityvalueattheendof
25yearsof$100,whatistheannualrateofreturnonthebond?
(a) 5percent
(b) 6percent
(c) 7percent
(d) 8percent
Answer: A
LevelofDifficulty:2
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,or4.9,4.11,4.12)

59.

IfaUnitedStatesSavingsbondcanbepurchasedfor$14.60andhasamaturityvalueattheendof
25yearsof$100,whatistheannualrateofreturnonthebond?
(a) 6percent
(b) 7percent
(c) 8percent
(d) 9percent
Answer: C
LevelofDifficulty:2
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,4.9,4.11,4.12)

60.

Janicewouldliketosendherparentsonacruisefortheir25thweddinganniversary.Shehaspriced
thecruiseat$15,000andshehas5yearstoaccumulatethismoney.HowmuchmustJanicedeposit
annuallyinanaccountpaying10percentinterestinordertohaveenoughmoneytosendherparents
onthecruise?
(a) $1,862
(b) $2,457
(c) $3,000
(d) $2,234
Answer: B
LevelofDifficulty:2
LearningGoal:6
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

193GitmanPrinciplesofFinance,EleventhEdition

61.

Marlaborrows$4,500at12percentannuallycompoundedinteresttoberepaidinfourequalannual
installments.Theactualendofyearpaymentis
(a) $942.
(b) $1,125.
(c) $1,482.
(d) $2,641.
Answer: C
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

62.

Bettyborrows$50,000at10percentannuallycompoundedinteresttoberepaidinfourequalannual
installments.Theactualendofyearloanpaymentis
(a) $10,774.
(b) $12,500.
(c) $14,340.
(d) $15,773.
Answer: D
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

63.

Donnamakesannualendofyearpaymentsof$5,043.71onafouryearloanwithaninterestrateof
13percent.Theoriginalprincipalamountwas
(a) $24,462.
(b) $15,000.
(c) $3,092.
(d) $20,175.
Answer: B
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

64.

Marionmakesannualendofyearpaymentsof$6,260.96onafiveyearloanwithan8percent
interestrate.Theoriginalprincipalamountwas
(a) $31,000.
(b) $30,000.
(c) $25,000.
(d) $20,000.
Answer: C
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

Chapter4TimeValueofMoney194

65.

Charleneownsstockinacompanywhichhasconsistentlypaidagrowingdividendoverthelastfive
years.ThefirstyearCharleneownedthestock,shereceived$1.71pershareandinthefifthyear,
shereceived$2.89pershare.Whatisthegrowthrateofthedividendsoverthelastfiveyears?
(a) 7percent
(b) 14percent
(c) 12percent
(d) 5percent
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,or4.9,4.11,4.12)

66.

Julianwasgivenagoldcoinoriginallypurchasedfor$1byhisgreatgrandfather50yearsago.
Todaythecoinisworth$450.Therateofreturnrealizedonthesaleofthiscoinisapproximately
equalto
(a) 7.5%.
(b) 13%.
(c) 50%.
(d) cannotbedeterminedwithgiveninformation.
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,or4.9,4.11,4.12)

67.

YoungSookownsstockinacompanywhichhasconsistentlypaidagrowingdividendoverthelast
10years.ThefirstyearYoungSookownedthestock,shereceived$4.50pershareandinthe10th
year,shereceived$4.92pershare.Whatisthegrowthrateofthedividendsoverthelast10years?
(a) 5percent
(b) 4percent
(c) 2percent
(d) 1percent
Answer: D
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,or4.9,4.11,4.12)

68.

Therateofreturnearnedonaninvestmentof$50,000todaythatguaranteesanannuityof$10,489
forsixyearsisapproximately
(a) 5%.
(b) 7%.
(c) 30%.
(d) noneoftheabove.
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

195GitmanPrinciplesofFinance,EleventhEdition

69.

Whatistherateofreturnonaninvestmentof$16,278ifthecompanyexpectstoreceive$3,000per
yearforthenext10years?
(a) 18percent
(b) 13percent
(c) 8percent
(d) 3percent
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

70.

Whatistherateofreturnonaninvestmentof$124,090ifthecompanyexpectstoreceive$10,000
peryearforthenext30years?
(a) 7percent
(b) 4percent
(c) 1percent
(d) 0percent
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

71.

Alocalbrokeragefirmisofferingazerocouponcertificateofdepositfor$10,000.Atmaturity,
threeyearsfromnow,theinvestorwillreceive$14,000.Whatistherateofreturnonthis
investment?
(a) 14percent
(b) 13percent
(c) 12percent
(d) 11percent
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,or4.9,4.11,4.12)

72.

Alocalbankisofferingazerocouponcertificateofdepositfor$25,000.Atmaturity,threeyears
fromnow,theinvestorwillreceive$32,000.Whatistherateofreturnonthisinvestment?
(a) 3percent
(b) 6percent
(c) 9percent
(d) 12percent
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6,or4.9,4.11,4.12)

Chapter4TimeValueofMoney196

73.

AskichaletinAspennowcosts$250,000.Inflationisexpectedtocausethispricetoincreaseat
5percentperyearoverthenext10yearsbeforeBarbaraandPhilretirefromsuccessfulinvestment
bankingcareers.Howlargeanequalannualendofyeardepositmustbemadeintoanaccount
payinganannualrateofinterestof13percentinordertobuytheskichaletuponretirement?
(a) $8,333
(b) $13,572
(c) $25,005
(d) $22,109
Answer: D
LevelofDifficulty:3
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6,and4.13,4.14)

74.

AbeachhouseinsouthernCalifornianowcosts$350,000.Inflationisexpectedtocausethispriceto
increaseat5percentperyearoverthenext20yearsbeforeLouisandKateretirefromsuccessful
careersincommercialart.Howlargeanequalannualendofyeardepositmustbemadeintoanaccount
payinganannualrateofinterestof13percentinordertobuythebeachhouseuponretirement?
(a) $11,471
(b) $4,323
(c) $79,977
(d) $17,350
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6,and4.13,4.14)

75.

Susanisplanningtoaccumulate$40,000bytheendof5yearsbymaking5equalannualdeposits.If
sheplanstomakeherfirstdeposittodayandcanearnanannualcompoundrateof9percentonher
investment,howmuchmusteachdepositbeinordertoaccumulatethe$40,000.
(a) $6,132
(b) $6,683
(c) $23,844
(d) $9,434
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

76.

Davidwishestoaccumulate$1millionbytheendof20yearsbymakingequalannualendofyear
depositsoverthenext20years.IfDavidcanearn10percentonhisinvestments,howmuchmusthe
depositattheendofeachyear?
(a) $14,900
(b) $50,000
(c) $117,453
(d) $17,460
Answer: D
LevelofDifficulty:3
LearningGoal:6

197GitmanPrinciplesofFinance,EleventhEdition

Topic:FutureValueofanAnnuity(Equation4.13,4.14)
77.

Darlenewishestoaccumulate$50,000bytheendof10yearsbymakingequalannualendofyear
depositsoverthenext10years.IfDarlenecanearn5percentonherinvestments,howmuchmust
shedepositattheendofeachyear?
(a) $3,975
(b) $6,475
(c) $5,000
(d) $4,513
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

78.

Kathyborrows$10,000fromthebank.Forafouryearloan,thebankrequiresannualendofyear
paymentsof$3,223.73.Theannualinterestrateontheloanis
(a) 9percent.
(b) 10percent.
(c) 11percent.
(d) 12percent.
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

79.

Carolborrows$20,000fromthebank.Forafiveyearloan,thebankrequiresannualendofyear
paymentsof$4,878.05.Theannualinterestrateontheloanis
(a) 6percent.
(b) 7percent.
(c) 8percent.
(d) 9percent.
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

80.

Chrisisplanningforhersonscollegeeducationtobeginfiveyearsfromtoday.Sheestimatesthe
yearlytuition,books,andlivingexpensestobe$5,000peryearforafouryeardegree.Howmuch
mustChrisdeposittoday,ataninterestrateof8percent,forhersontobeabletowithdraw$5,000
peryearforfouryearsofcollege?
(a) $20,000
(b) $13,620
(c) $39,520
(d) $11,277
Answer: D
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6,and4.15,4.16)

Chapter4TimeValueofMoney198

81.

Michaelisplanningforhissonscollegeeducationtobegintenyearsfromtoday.Heestimatesthe
yearlytuition,books,andlivingexpensestobe$10,000peryearforafouryeardegree.Howmuch
mustMichaeldeposittoday,ataninterestrateof12percent,forhissontobeabletowithdraw
$10,000peryearforfouryearsofcollege?
(a) $12,880
(b) $9,780
(c) $40,000
(d) $18,950
Answer: B
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6,and4.15,4.16)

82.

Debbieborrows$3,500fromthebankat12percentannuallycompoundedinteresttoberepaidin
fourequalannualinstallments.Theinterestpaidinthefirstyearis
(a) $152.
(b) $277.
(c) $420.
(d) $1,152.
Answer: C
LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)

83.

Robertborrows$10,500fromthebankat11percentannuallycompoundedinteresttoberepaidin
sixequalannualinstallments.Theinterestpaidinthefirstyearis
(a) $1,155.
(b) $2,481.
(c) $144.
(d) $1,327.
Answer: A
LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)

84.

Teffanborrows$4,500fromthebankat9percentannuallycompoundedinteresttoberepaidin
threeequalannualinstallments.Theinterestpaidinthethirdyearis_________.
(a) $277.95
(b) $405.00
(c) $352.00
(d) $147.00
Answer: D
LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)

199GitmanPrinciplesofFinance,EleventhEdition

85.

Pamborrows$19,500fromthebankat8percentannuallycompoundedinteresttoberepaidin10
equalannualinstallments.Theinterestpaidinthethirdyearis_________.
(a) $1,336.00
(b) $1,560.14
(c) $2,906.11
(d) $1,947.10
Answer: A
LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)

86.

EntertainersAidplansfiveannualcolossalconcerts,eachinadifferentnationscapital.The
concertswillraisefundsforanendowmentwhichwouldprovidetheWorldWideHungerFundwith
$3,000,000peryearintoperpetuity.Theendowmentwillbegivenattheendofthefifthyear.The
rateofinterestisexpectedtobe9percentinallfutureperiods.HowmuchmustEntertainersAid
depositeachyeartoaccumulatetotherequiredamount?
(a) $5,569,479
(b) $3,333,333
(c) $1,830,275
(d) $8,568,980
Answer: A
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.13,4.14and4.19)

87.

Awealthyartcollectorhasdecidedtoendowherfavoriteartmuseumbyestablishingfundsforan
endowmentwhichwouldprovidethemuseumwith$1,000,000peryearforacquisitionsinto
perpetuity.Theartcollectorwillgivetheendowmentuponherfiftiethbirthday10yearsfromtoday.
Sheplanstoaccumulatetheendowmentbymakingannualendofyeardepositsintoanaccount.The
rateofinterestisexpectedtobe6percentinallfutureperiods.Howmuchmusttheartcollector
depositeachyeartoaccumulatetotherequiredamount?
(a) $1,575,333
(b) $736,000
(c) $1,264,446
(d) $943,396
Answer: C
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.13,4.14and4.19)

Chapter4TimeValueofMoney200

88.

Howlongwouldittakeforyoutosaveanadequateamountforretirementifyoudeposit$40,000
peryearintoanaccountbeginningtodaythatpays12percentperyearifyouwishtohaveatotalof
$1,000,000atretirement?
(a) 12.2years
(b) 10.5years
(c) 14.8years
(d) 11.5years
Answer: D
LevelofDifficulty:2
LearningGoal:6
Topic:FindinganUnknownNumberofPeriods(Equation4.13,4.14)

89.

Howmanyyearswouldittakeforyoutosaveanadequateamountforretirementifyoudeposit
$2,000permonthintoanaccountbeginningtodaythatpays12percentperyearifyouwishtohave
atotalof$1,000,000atretirement?
(a) 13.7years
(b) 15.5years
(c) 14.9years
(d) 11.5years
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:FindinganUnknownNumberofPeriods(Equation4.13,4.14)

90.

Howlongwouldittakeforyoutosaveanadequateamountforretirementifyoudeposit$40,000
peryearintoanaccountbeginningoneyearfromtodaythatpays12percentperyearifyouwishto
haveatotalof$1,000,000atretirement?
(a) 15.0years
(b) 15.5years
(c) 14.5years
(d) 16.5years
Answer: A
LevelofDifficulty:2
LearningGoal:6
Topic:FindinganUnknownNumberofPeriods(Equation4.13,4.14)

91.

Whatannualrateofreturnwouldyouneedtoearnifyoudeposit$20,000peryearintoanaccount
beginningoneyearfromtodayinordertohaveatotalof$1,000,000in30years?
(a) 2.3%
(b) 3.3%
(c) 1.3%
(d) 4.3%
Answer: B
LevelofDifficulty:2
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.13,4.14)

201GitmanPrinciplesofFinance,EleventhEdition

92.

Whatannualrateofreturnwouldyouneedtoearnifyoudeposit$1,000permonthintoanaccount
beginningonemonthfromtodayinordertohaveatotalof$1,000,000in30years?
(a) 4.55%
(b) 5.28%
(c) 5.98%
(d) 6.23%
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.13,4.14)

93.

Whateffectiveannualrateofreturn(EAR)wouldyouneedtoearnifyoudeposit$1,000permonth
intoanaccountbeginningonemonthfromtodayinordertohaveatotalof$1,000,000in30years?
(a) 5.98%
(b) 6.55%
(c) 4.87%
(d) 6.14%
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.13,4.14)

94.

Howmuchwouldyouhaveinyouraccountattheendof10yearsifyoudeposit$2,000intothe
accounttodayifyouearn8percentinterestandinterestiscompoundedcontinuously?
(a) $4,317
(b) $4,444
(c) $4,451
(d) $4,521
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:ContinuousCompounding(Equation4.21,4.22)

95.

Assumeyouhaveachoicebetweentwodepositaccounts.AccountAhasanannualpercentagerate
of7.55percentbutwithinterestcompoundedmonthly.AccountBhasanannualpercentagerateof
7.45percentwithinterestcompoundedcontinuously.Whichaccountprovidesthehighesteffective
annualreturn?
(a) AccountA.
(b) AccountB.
(c) Bothprovidethesameeffectiveannualreturn.
(d) Wedonthavesufficientinformationtomakeachoice.
Answer: A
LevelofDifficulty:4
LearningGoal:5
Topic:ContinuousCompoundingandEffectiveAnnualRate(Equation4.21,4.22,4.23)

Chapter4TimeValueofMoney202

.4

Essay Questions

1.

Calculatethefuturevalueof$4,600receivedtodayifitisdepositedat9percentforthreeyears.
Answer: FV$4,600(1.295)$5,957
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,and4.6)

2.

Calculatethepresentvalueof$89,000tobereceivedin15years,assuminganopportunitycostof
14percent.
Answer: PV89,000(1.40)$12,460
LevelofDifficulty:1
LearningGoal:2
Topic:FutureValue(Equation4.9,4.11,and4.12)

3.

Jeaniehasdeposited$33,000todayinanaccountwhichwillearn10percentannually.Sheplansto
leavethefundsinthisaccountforsevenyearsearninginterest.Ifthegoalofthisdepositistocover
afutureobligationof$65,000,whatrecommendationwouldyoumaketoJeanie?
Answer: FV33,000(1.949)$64,317
Jeaniewillonlyhave$64,317attheendofsevenyearsunderthestatedarrangement.She
mustfindanaccountwithahigherinterestrateordepositalargersumtoday.
LevelofDifficulty:2
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,and4.6)

4.

EcoSystems,Inc.ispreparingafiveyearplan.Today,salesare$1,000,000.Ifthegrowthratein
salesisprojectedtobe10percentoverthenextfiveyears,whatwillthedollaramountofsalesbein
yearfive?
Answer: FV1,000,000(1.611)$1,611,000
LevelofDifficulty:2
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,and4.6)

5.

Fredhasinherited$6,000fromthedeathofBarney.HewouldliketousethismoneytobuyWilma
anewrockmobilecosting$7,000fortheir10thanniversarycelebrationwhichwilltakeplacein
2yearsfromnow.WillFredhaveenoughmoneytobuythegiftifhedepositshismoneyinan
accountpaying8percentcompoundedsemiannually?
Answer: n2,m2,i8%
FVPV(FVIF4%,4)6,000(1.170)$7,020
Yes,Fredwillhaveenoughmoneytobuytherockmobile.
LevelofDifficulty:2
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,and4.6)

203GitmanPrinciplesofFinance,EleventhEdition

6.

KayandArthurarenewlywedsandhavejustpurchasedacondominiumfor$70,000.Sincethe
condoisverysmall,theyhopetomoveintoasinglefamilyhousein5years.Howmuchwilltheir
condoworthin5yearsifinflationisexpectedtobe8percent?
Answer: PV$70,000,i8%,n5
FVPV(FVIF)70,000(1.469)$102,830.
LevelofDifficulty:2
LearningGoal:2
Topic:FutureValue(Equation4.4,4.5,and4.6)

7.

Calculatethepresentvalueofa$10,000perpetuityata6percentdiscountrate.
Answer: PV10,000/0.06$166,667
LevelofDifficulty:1
LearningGoal:3
Topic:Perpetuities(Equation4.19)

8.

Calculatethefuturevalueofanannuityof$5,000eachyearforeightyears,depositedat6percent.
Answer: FV5,000(9.897)$49,485
LevelofDifficulty:2
LearningGoal:3
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

9.

Calculatethepresentvalueofanannuityof$3,900eachyearforfouryears,assumingan
opportunitycostof10percent.
Answer: PV3,900(3.170)$12,363
LevelofDifficulty:2
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

10.

Lindahasdecidedtosetupanaccountthatwillpayhergranddaughter(Janice)$5,000ayear
indefinitely.HowmuchshouldLindadepositinanaccountpaying8percentannualinterest?
Answer: PV5,000/0.08$62,500
LevelofDifficulty:2
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.13,4.14)

11.

Awealthyindustrialistwishestoestablisha$2,000,000trustfundwhichwillprovideincomeforhis
grandchildintoperpetuity.Hestipulatesinthetrustagreementthattheprincipalmaynotbe
distributed.Thegrandchildmayonlyreceivetheinterestearned.Iftheinterestrateearnedonthe
trustisexpectedtobeatleast7percentinallfutureperiods,howmuchincomewillthegrandchild
receiveeachyear?
Answer: $2,000,0000.07$140,000
LevelofDifficulty:2
LearningGoal:3
Topic:Perpetuities(Equation4.19)

Chapter4TimeValueofMoney204

12.

Caraestablishesasevenyear,8percentloanwithabankrequiringannualendofyearpaymentsof
$960.43.Calculatetheoriginalprincipalamount.
Answer: PVA960.43(5.206)$5,000
LevelofDifficulty:2
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

13.

Alotteryadministratorhasjustcompletedthestatesmostrecent$50millionlottery.Receiptsfrom
lotterysaleswere$50millionandthepayoutwillbe$5millionattheendofeachyearfor10years.
Theexpensesofrunningthelotterywere$800,000.Thestatecanearnanannualcompoundrateof
8percentonanyfundsinvested.
(a) Calculatethegrossprofittothestatefromthislottery.
(b) Calculatethenetprofittothestatefromthislottery(notaxes).
Answers:
Lotteryrevenue
Less:Costofpayout
$5,000,0006.710
Grossprofi
(a)Less:operatingexpenses
(b)Netprofit

$50,000,000
33,550,000
$16,450,000
800,000
$15,650,000

LevelofDifficulty:3
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)
14.

Kimberlyhasjustwona$20millionlottery,whichwillpayher$1millionattheendofeachyear
for20years.Aninvestorhasofferedher$10millionforthisannuity.Sheestimatesthatshecanearn
10percentinterest,compoundedannually,onanyamountssheinvests.Sheasksyouradviceon
whethertoacceptorrejecttheoffer.Whatwillyoutellher?(IgnoreTaxes)
Answer: P$1,000,0008.514$8,514,000
$10,000,000>$8,514,000Accepttheoffer.
LevelofDifficulty:3
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

15.

Mr.Handymanhasbeenawardedabonusforhisoutstandingwork.Hisemployeroffershima
choiceofalumpsumof$5,000today,oranannuityof$1,250ayearforthenextfiveyears.Which
optionshouldMr.Handymanchooseifhisopportunitycostis9percent?
Answer: PVA$1,250(PVIFA)1,250(3.890)$4,862.50
Mr.Handymanshouldchoosealumpsumof$5,000today.
LevelofDifficulty:3
LearningGoal:3
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

205GitmanPrinciplesofFinance,EleventhEdition

16.

Intheirmeetingwiththeiradvisor,Mr.&Mrs.Smithconcludedthattheywouldneed$40,000per
yearduringtheirretirementyearsinordertolivecomfortably.Theywillretire10yearsfromnow
andexpecta20yearretirementperiod.HowmuchshouldMr.&Mrs.Smithdepositnowinabank
accountpaying9percenttoreachfinancialhappinessduringretirement?
Answer: Theamountofmoneyrequiredatthebeginningoftheretirementperiodis:
n20,i9%
PVAPMT(PVIFA)40,000(9.129)$365,160
n10,i9%
PV365,160(0.422)$154,097.52
LevelofDifficulty:3
LearningGoal:3
Topic:ComplexTimeValueProblems(Equation4.13,4.14,and4.15,4.16)

17.

Jayis30yearsoldandwillretireatage65.Hewillreceiveretirementbenefitsbutthebenefitsare
notgoingtobeenoughtomakeacomfortableretirementlifeforhim.Jayhasestimatedthatan
additional$25,000ayearoverhisretirementbenefitswillallowhimtohaveasatisfactorylife.How
muchshouldJaydeposittodayinanaccountpaying6percentinteresttomeethisgoal?AssumeJay
willhave15yearsofretirement.
Answer: PMT$25,000,n15,i6%
P(65)25,000(PVIFA)25,000(9.712)$242,800
FV$242,800,n35,i6%
P(30)242,800(PVIF)242,800(0.130)$31,564
LevelofDifficulty:4
LearningGoal:3
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6and4.15,4.16)

18.

Youhavebeengivenachoicebetweentworetirementpoliciesasdescribedbelow.
PolicyA:Youwillreceiveequalannualpaymentsof$10,000beginning35yearsfromnowfor
10years.
PolicyB:Youwillreceiveonelumpsumof$100,000in40yearsfromnow.
Whichpolicywouldyouchoose?Assumerateofinterestis6percent.
Answer: PolicyA:presentvalueoftheannuityatthebeginningofthe35yearsfromnow:
PVAPMT(PVIFA)10,000(7.360)$73,600
PolicyB:presentvalueofthelumpsumatthebeginningofthe35yearsfromnow:
PVFV(PVIF)100,000(0.747)$74,700
IwillchoosepolicyB.
LevelofDifficulty:4
LearningGoal:3
Topic:ComplexTimeValueProblems(Equation4.9,4.11,4.12and4.15,4.16)

Chapter4TimeValueofMoney206

19.

Joieisplanningtoattendcollegewhenshegraduatesfromhighschool7yearsfromnow.She
anticipatesthatshewillneed$10,000atthebeginningofeachcollegeyeartopayfortuitionand
fees,andhavesomespendingmoney.Joiehasmadeanarrangementwithherfathertodothe
householdchoresifherdaddeposits$3,500attheendofeachyearforthenext7yearsinabank
accountpaying8percentinterest.WilltherebeenoughmoneyintheaccountforJoietopayforher
collegeexpenses?Assumetherateofintereststaysat8percentduringthecollegeyears.
Answer: Atthebeginningofthefirstyearofcollege:
PV10,00010,000(PVIFA12%,3)
10,00010,000(2.577)$35,770
PMT$3,500,i8%,n7
FVA3,500(FVIFA)3,500(8.923)$31,230
Joiewillneed$4,539(35,77031,230)additionalmoneytopayforhercollege
education.
LevelofDifficulty:4
LearningGoal:3
Topic:ComplexTimeValueProblems(Equation4.13,4.14and4.15,4.16)

20.

Duringherfouryearsatcollege,Rosereceivedthefollowingamountsofmoneyattheendofeach
yearfromhergrandmother.Shedepositedhermoneyinasavingaccountpaying6percentrateof
interest.HowmuchmoneywillRosehaveongraduationday?
Year
1
2
3
4

$
100
200
300
400

Answer:
Year
1
2
3
4

$
$100
200
300
400

n
3
2
1
0

LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.4,4.5,4.6)

FVIF
1.191
1.124
1.060
1.000

FV
$119.10
224.80
318.00
400.00
$1,061.90

207GitmanPrinciplesofFinance,EleventhEdition

21.

Youhaveprovidedyourfriendwithaserviceworth$8,500.Yourfriendoffersyouthefollowing
cashflowinsteadofpaying$8,500today.Shouldyouaccepthisofferifyouropportunitycostis
8percent?
Year
1
2
3
4

CashFlow
$4,000
3,000
2,000
1,000

Answer:
Year
1
2
3
4

CashFlow
$4,000
3,000
2,000
1,000

PVIF
0.926
0.857
0.794
0.735

PV
$3,704
2,571
1,588
735
$8,598

Chapter4TimeValueofMoney208

Accepttheoffer.
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)
22.

Calculatethepresentvalueof$5,800receivedattheendofyear1,$6,400receivedattheendof
year2,and$8,700attheendofyear3,assuminganopportunitycostof13percent.
Answer: PV5,800(0.885)6,400(0.783)8,700(0.693)$16,173.30
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)

23.

Calculatethepresentvalueof$800receivedatthebeginningofyear1,$400receivedatthe
beginningofyear2,and$700receivedatthebeginningofyear3,assuminganopportunitycostof
9percent.
Answer: PV800400(0.917)700(0.842)$1,756.20
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12)

24.

Calculatethecombinedfuturevalueattheendofyear3of$1,000receivedattheendofyear1,
$3,000receivedattheendofyear2,and$5,000receivedattheendofyear3,allsumsdepositedat
5percent.
Answer: FV1000(1.102)3000(1.050)5000$9,252
LevelofDifficulty:2
LearningGoal:4
Topic:MixedStreams(Equation4.4,4.5,4.6)

25.

Youareconsideringthepurchaseofnewequipmentforyourcompanyandyouhavenarroweddown
thepossibilitiestotwomodelswhichperformequallywell.However,themethodofpayingforthe
twomodelsisdifferent.ModelArequires$5,000peryearpaymentforthenextfiveyears.ModelB
requiresthefollowingpaymentschedule.Whichmodelshouldyoubuyifyouropportunitycostis
8percent?
Year
1
2
3
4
5

Payment(ModelB)
$7,000
6,000
5,000
4,000
3,000

209GitmanPrinciplesofFinance,EleventhEdition

Answer: ModelA:PVPMT(PVIFA)5,000(3.993)$19,965
ModelB
Payment
PVIF
$7,000
0.926
6,000
0.857
5,000
0.794
4,000
0.735
3,000
0.681

Year
1
2
3
4
5

PV
$6,482
5,142
3,970
2,940
2,043
$20,577

BuyModelA.
LevelofDifficulty:3
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12and4.15,4.16)
26.

LastChristmas,Larryreceivedanannualbonusof$1,500.Theseannualbonusesareexpectedto
growby5percentforthenext5years.HowmuchwillLarryhaveattheendofthefifthyearifhe
investshisChristmasbonuses(includingthemostrecentbonus)inaprojectpaying8percentper
year?
Answer:
Year

Bonus0

FVIF(5%,

Bonus(t)

t)

0
1
2
3
4
5

$1,500
1,500
1,500
1,500
1,500
1,500

1.000
1.050
1.102
1.158
1.216
1.276

FVIF(8%,n FV
)

$1,500
1,575
1,653
1,737
1,824
1,914

5
4
3
2
1
0

1.469
1.360
1.260
1.166
1.080
1.000

$2,203.50
2,142.00
2,082.78
2,025.34
1,969.92
1,914.00
$12,337.54

LevelofDifficulty:4
LearningGoal:4
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6)
27.

Calculatethepresentvalueofthefollowingstreamofcashflows,assumingthatthefirms
opportunitycostis15percent.
Years
17
810

Amount
$12,000
14,000

Chapter4TimeValueofMoney210

Answer: PV12,000(4.160)14,000(5.0194.160)$61,946
LevelofDifficulty:4
LearningGoal:4
Topic:MixedStreams(Equation4.9,4.11,4.12and4.15,4.16)
28.

Calculatethefuturevalueof$6,490receivedtodayanddepositedforfiveyearsinanaccountwhich
paysinterestof14percentcompoundedsemiannually.
Answer: FV6,490(1.967)$12,766
LevelofDifficulty:2
LearningGoal:5
Topic:FutureValue(Equation4.4,4.5,4.6)

29.

Calculatethefuturevalueof$10,000receivedtodayanddepositedforsixyearsinanaccountwhich
paysinterestof12percentcompoundedquarterly.
Answer: FV10,000(2.033)$20,330
LevelofDifficulty:3
LearningGoal:5
Topic:FutureValue(Equation4.4,4.5,4.6)

30.

Jeannehasjustgraduatedfromhighschoolandhasreceivedanawardfor$5,000.Shewouldliketo
depositthemoneyinaninterestearningaccountuntilshegraduatesfromcollege(i.e.,fouryears
fromnow).Inhersearchforthehighestinterestearningaccount,shehasnarrowedthelistdownto
thefollowingtwoaccounts:1)bankApays9percentinterestcompoundedannually,and2)bankB
pays8percentinterestcompoundedsemiannually.Whichisthebetteroffer,andhowmuchwill
Jeannehaveupongraduationfromcollege?
Answer: BankA:n4,i9%,m1
FV5,000(1.412)$7,060
BankB:n4,i8%,m2
FV5,000(1.369)$6,845
JeanneshoulddeposithermoneyinBankAandshewillhave$7,060uponhergraduation
fromcollege.
LevelofDifficulty:3
LearningGoal:5
Topic:NominalandEffectiveInterestRates(Equation4.23)

31.

Janiceborrows$25,000fromthebankat15percenttoberepaidin10equalannualinstallments.
Calculatetheendofyearpayment.
Answer: PMT25,000/5.019$4,981.07
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

211GitmanPrinciplesofFinance,EleventhEdition

32.

ThefollowingtablepresentstheSallysSillyServiceCompanysnetearningsforthepastsixyears.
Computethegrowthrateinthecompanysearnings.
Year
2002
2001
2000
1999
1998
1997

Return
$2,659
2,500
2,370
2,100
1,890
1,728

Chapter4TimeValueofMoney212

Answer: FVIFFV/PV2,659/1,7281.539n5,i9%
LevelofDifficulty:2
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6or4.9,4.11,4.12)
33.

Marchaspurchasedanewcarfor$15,000.Hepaid$2,500asdownpaymentandhepaidthe
balancebyaloanfromhishometownbank.Theloanistobepaidonamonthlybasisfortwoyears
charging12percentinterest.Howmucharethemonthlypayments?
Answer: PV15,0002,500$12,500,i12%,n2,m12
PMTPVA/PVIFA12,500/21.244$588.40
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

34.

Youhavebeengiventheopportunitytoearn$20,000fiveyearsfromnowifyouinvest$9,524
today.Whatwillbetherateofreturntoyourinvestment?
Answer: FVIF20,000/9,5242.10i16%.
LevelofDifficulty:2
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6or4.9,4.11,4.12)

35.

Tenyearsago,Tompurchasedapaintingfor$300.Thepaintingisnowworth$1,020.Tomcould
havedeposited$300inasavingsaccountpaying12percentinterestcompoundedannually.Which
ofthesetwooptionswouldhaveprovidedTomwithahigherreturn?
Answer: PV$300,FV$1,020,n10
FVIF1,020/3003.40i13%
Paintinghasahigherreturn(13percent)incomparisontothe12percentrateofreturn
fromthesavingsaccount.
LevelofDifficulty:2
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6or4.9,4.11,4.12)

36.

Findtheequalannualendofyearpaymenton$50,000,15year,and10percentloan.
Answer: PMTPVA/PVIFA50,000/7.606$6,573.76
LevelofDifficulty:2
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

37.

Afirmwishestoestablishafundwhich,in10years,willaccumulateto$10,000,000.Thefundwill
beusedtorepayanoutstandingbondissue.Thefirmplanstomakedeposits,whichwillearn
12percent,tothisfundattheendofeachofthe10yearspriortomaturityofthebond.Howlarge
mustthesedepositsbetoaccumulateto$10,000,000?
Answer: PMT10,000,000/17.549$569,833.04
LevelofDifficulty:3
LearningGoal:6
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

213GitmanPrinciplesofFinance,EleventhEdition

38.

Johnborrowed$12,000tobuyanewcarandexpectstopay$564.87permonthforthenext2years
topayofftheloan.Whatistheloansrateofinterest?
Answer: PVA$12,000,PMT$564.87,n2,m12
PVIFAPVA/PMT12,000/564.8721.244i/m1%i12%
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

39.

TheNewYorkSoccerAssociationwouldliketoaccumulate$10,000bytheendof4yearsfrom
nowtofinanceabigsoccerweekendforitsmembers.TheAssociationcurrentlyhas$2,500and
wishestoraisethebalancebyarrangingannualfundraisingevents.Howmuchmoneyshouldthey
raiseateachannualfundraisingeventassuming8percentrateofinterest?
Answer: Futurevalueof$2,500attheendoffourthyear:
FV2,500(1.360)$3,400
Balance10,0003,400$6,600
PMTFVA/FVIFA6,600/4.506$1,464.71
LevelofDifficulty:3
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6and4.13,4.14)

40.

Ms.Dayneeds$20,000tobuyherdreamcar.Inhersearchforthebest(lowcost)loan,shehas
gatheredthefollowinginformationfromthreelocalbanks.WhichbankwouldyourecommendMs.
Dayborrowfrom?
Bank
A
B
C

AnnualPayment
$8,326.40
6,309.15
5,411.25

Term(years)
3
4
5

Answer: A:PVIFA20,000/8,326.402.402i12%
B:PVIFA20,000/6,309.153.170i10%
C:PVIFA20,000/5,411.253.696i11%
Ms.DayshouldborrowfromBankB.BankBhasthelowestrate.
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

Chapter4TimeValueofMoney214

41.

Adeepdiscountbondcanbepurchasedfor$312andin20yearsitwillbeworth$1,000.Whatis
therateofinterestonthebond?
Answer: FVIF1,000/3123.205i6%
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6or4.9,4.11,4.12)

42.

Timothyborrows$6,930fromthebank.Forafouryearloan,thebankrequiresannualendofyear
paymentsof$2,281.86.Calculatetheinterestrateontheloan.
Answer: PVIFA6,930/2,281.863.037,i12%
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.15,4.16)

43.

Tomisevaluatingthegrowthrateindividendsofacompanyoverthepast6years.Whatisthe
annualcompoundgrowthrateifthedividendsareasfollows:
Year
1997
1998
1999
2000
2001
2002

Dividends
$1.38
1.52
1.85
1.80
1.95
2.15

215GitmanPrinciplesofFinance,EleventhEdition

Answer: $2.15/$1.381.558FVIF5yearsor
$1.38/$2.150.6419PVIF5years
approximately9percent.
LevelofDifficulty:3
LearningGoal:6
Topic:FindingInterestorGrowthRates(Equation4.4,4.5,4.6or4.9,4.11,4.12)
44.

Toexpanditsoperation,theInternationalToolsInc.(ITI)hasappliedfora$3,500,000loanfromthe
InternationalBank.AccordingtoITIsfinancialmanager,thecompanycanonlyaffordamaximum
yearlyloanpaymentof$1,000,000.ThebankhasofferedITI,1)a3yearloanwitha10percent
interestrate,2)a4yearloanwitha11percentinterestrate,or3)a5yearloanwitha12percent
interestrate.
(a) Computetheloanpaymentundereachoption.
(b) Whichoptionshouldthecompanychoose?
Answers:(a)
1)PMT3,500,000/2.487$1,407,318.05
2)PMT3,500,000/3.102$1,128,304.32
3)PMT3,500,000/3.605$970,873.79
(b) Thecompanyshouldchooseoption#3.
LevelofDifficulty:3
LearningGoal:6
Topic:PresentValueofanAnnuity(Equation4.15,4.16)

45.

Tobuyhisfavoritecar,LarryisplanningtoaccumulatemoneybyinvestinghisChristmasbonuses
forthenextfiveyearsinasecuritywhichpaysa10percentannualrateofreturn.Thecarwillcost
$20,000attheendofthefifthyearandLarrysChristmasbonusis$3,000ayear.WillLarry
accumulateenoughmoneytobuythecar?
Answer: FVAPMT(FVIFA)3,000(6.105)$18,315
Larrywillnothaveenoughmoneytobuythecar.Heshouldeitherinvestmoremoneyor
deposithischristmasbonusesinasecuritypayingahigherrateofreturn.
LevelofDifficulty:3
LearningGoal:6
Topic:FutureValueofanAnnuity(Equation4.13,4.14)

46.

Mr.&Mrs.Pribelwishtopurchaseaboatin8yearswhentheyretire.Theyareplanningtopurchase
theboatusingproceedsfromthesaleoftheirpropertywhichiscurrentlyworth$90,000andits
valueisgrowingat7percentayear.Theboatiscurrentlyworth$200,000increasingat5percent
peryear.Inadditiontothevalueoftheirproperty,howmuchadditionalmoneyshouldtheydeposit
attheendofeachyearinanaccountpaying9percentannualinterestinordertobeabletobuythe
boatuponretirement?
Answer: Valueofthepropertyuponretirement:
PV$90,000,i7%,n8
FVPV(FVIF)90,000(1.718)$154,620
Valueoftheboatuponretirement:
PV$200,000,i5%,n8
FVPV(FVIF)200,000(1.477)$295,400
Additionalmoneyneededuponretirement:

Chapter4TimeValueofMoney216

$295,400$154,620$140,780
Amountofmoneyneededtodepositattheendofeachyear:
FV$140,780,n8,i9%,PMT?
PMTFV/FVIFA140,780/11.028$12,765.69
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6and4.13,4.14)
47.

Herberthasopenedaretirementfundaccountwhichpays7percentinterestandrequires$5,000
annualdeposits.Herbertwillretirein15yearsandexpects10yearsofretirementlife.Whatisthe
maximumannualretirementbenefitHerbertcangetduringhisretirementyears?
Answer: i7%,PMT$5,000,n15
Atthebeginningofretirement:
FVA5,000(FVIFA)5,000(25.129)$125,645
Annualretirementbenefit:i7%,n10,P$125,645
PMTPVA/PVIFA125,645/7.024$17,887.96
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.13,4.14and4.15,4.16)

217GitmanPrinciplesofFinance,EleventhEdition

48.

Brianborrows$5,000fromabankat8percentannuallycompoundedinteresttoberepaidinfive
annualinstallments.Calculatetheprincipalpaidinthethirdyear.
Answer: PMT5,000/3.993$1,252.19
Year
0
1
2
3

Payment
0
$1,252.19
1,252.19
1,252.19

Principal
$5,000.00
$852.19
920.37
993.99

Interest

Balance

$400.00
331.83
258.20

4,147.81
3,227.44

Theprincipalpaidinthethirdyearis$993.99
LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)
49.

Nancywouldliketoaccumulate$10,000bytheendof3yearsfromnowtobuyasportscarfrom
herfriend,Jim.Shehas$2,500nowandwouldliketosaveequalannualendofyeardepositstopay
forthecar.Howmuchshouldshedepositattheendofeachyearinanaccountpaying8percent
interesttobuythecar?
Answer: Futurevalueof$2,500attheendofyear3:
FV2,500(FVIF)2,500(1.260)$3,150
Balance10,0003,150$6,850
PMTFVA/FVIFA6,850/3.246$2,110.29
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6and4.13,4.14)

50.

Toexpanditsoperation,InternationalToolsInc.hasappliedtotheInternationalBankfora3year,
$3,500,000loan.Preparealoanamortizationtableassuming10percentrateofinterest.
Answer: PMT3,500,000/2.487$1,407,318.05
Year
0
1
2
3

Payment
0
$1,407,318.05
1,407,318.05
1,407,318.05

Principal
$3,500,000.00
$1,057,318.05
1,163,049.85
1,279,354.84

LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)

Interest

Balance

$350,000.00
244,268.20
127,963.21

2,442,681.95
1,279,632.10

Chapter4TimeValueofMoney218

51.

Kenborrows$15,000fromabankat10percentannuallycompoundedinteresttoberepaidinsix
equalinstallments.Calculatetheinterestpaidinthesecondyear.
Answer: PMT15,000/4.355$3,444.32
Year
0
1
2

Payment
0
$3,444.32
3,444.32

Principal
$15,000
$1,944.32
1,305.57

Interest

Balance

$1,500.00

13,055

Theinterestpaidinthesecondyearis$1,305.57
LevelofDifficulty:4
LearningGoal:6
Topic:LoanAmortization(Equation4.15,4.16)
52.

Suzywantstobuyahousebutdoesnotwanttogetaloan.Theaveragepriceofherdreamhouseis
$500,000anditspriceisgrowingat5percentperyear.HowmuchshouldSuzyinvestinaprojectat
theendofeachyearforthenext5yearsinordertoaccumulateenoughmoneytobuyherdream
housewithcashattheendofthefifthyear?Assumetheprojectpays12percentrateofreturn.
Answer: FV500,000(1.276)$638,000
PMT638,000/6.353$100,425
LevelofDifficulty:4
LearningGoal:6
Topic:ComplexTimeValueProblems(Equation4.4,4.5,4.6and4.13,4.14)

53.

Assumeyouhaveachoicebetweentwodepositaccounts.AccountXhasanannualpercentagerate
of12.25percentbutwithinterestcompoundedmonthly.AccountYhasanannualpercentagerateof
12.20percentwithinterestcompoundedcontinuously.Whichaccountprovidesthehighesteffective
annualreturn?
Answer: AccountX
EAR[1(0.1225/12)12112.96%
AccountY
EARe.12112.75%
ChooseX
LevelofDifficulty:4
LearningGoal:5
Topic:ContinuousCompoundingandEffectiveAnnualRate(Equation4.21,4.22,4.23)

219GitmanPrinciplesofFinance,EleventhEdition

54.

Congratulations!Youhavejustwonthelottery!However,thelotterybureauhasjustinformedyou
thatyoucantakeyourwinningsinoneoftwoways.ChoiceXpays$1,000,000.ChoiceYpays
$1,750,000attheendoffiveyearsfromnow.Usingadiscountrateof5percent,basedonpresent
values,whichwouldyouchoose?Usingthesamediscountrateof5percent,basedonfuturevalues,
whichwouldyouchoose?Whatdoyourresultssuggestasageneralruleforapproachingsuch
problems?(Makeyourchoicesbasedpurelyonthetimevalueofmoney.)
Answer: ThePVofA$1,000,000;ThePVofB$1,371,000;TheFVofA$1,276,000;The
FVofB$1,500,000.Basedonbothpresentvaluesandfuturevalues,Bisthebetter
choice.Thestudentshouldrecognizethatfindingpresentvaluesandfindingfuturevalues
aresimplyreverseprocessesofoneanother,andthatchoosingbetweentwolumpsums
basedonPVwillalwaysgivethesameresultaschoosingbetweenthesametwolump
sumsbasedonFV.
LevelofDifficulty:2
LearningGoal:2
Topic:PresentValueandFutureValue(Equation4.4,4.5,4.6,4.9,4.11,4.12)

55.

NicoisthenewassistantbranchmanagerofalargerFloridabasedbankandthebranchmanagerhas
askedhimaquestiontotesthisknowledge.Thequestionheaskediswhichrateshouldthebank
advertiseonmonthlycompoundedloans,thenominalannualpercentagerateortheeffectiveannual
percentagerate?Whichrateshouldthebankadvertiseonquarterlycompoundedsavingsaccounts?
Explain.Asaconsumer,whichwouldyouprefertoseeandwhy?
Answer: Abankwouldratheradvertisetheannualpercentagerateonloanssincethisrateappears
tobelowerandtheeffectiveannualrate.Withrespecttosavingsaccounts,thebankwould
ratheradvertisetheeffectiveratesincethisratewillbehigherthantheannualpercentage
ratewithcompoundingfrequencygreaterthanannually.Asaconsumer,theeffectiverate
isthemoreimportantratesinceitrepresentstherateactuallypaidorearned.
LevelofDifficulty:3
LearningGoal:5
Topic:NominalandEffectiveInterestRates(Equation4.23)