STP #5.5. You just bought a corporate bond at $863.75 today.

In five years the

bond will mature and you will receive $1,000. What is the rate of return
on this bond?
Price of bond today 863.75 $
Number of years till bond matures 5
Future value of bond $1,000
PV
n
FVIF i% FV
Prove the future value$1,000

Trial & Error Method to solve for i% that results in a FV of $1,000.
STP #5.4. Twenty-five years ago, Amanda Carter investec $10,000 in an account paying an
annual interest rate of 5.75 percent. What is the value of the investment today?
What is the interest on interest earned on this investment?
Amount invested 25 years ago $10,000
Number of years invested 25
Annual interest rate 5.75%
PV
n
i%
FV Value of investment today
interest per year
Sinple interest over 25 years
Interest on Interest
STP #5.3. What is the future value of an investment of $3,000 after three years
with compounding at the following rates and frequencies:
a. 8.75 percent compounded monthly
b. 8.625 percent compounded daily
c. 8.5 percent compounded continuously
Investment $3,000
Number of years 3
PV 3000
i%
n
m 12
FV
PV
i%
n
m 365
FV
PV
i%
n
m 100000
FV
STP #5.2. Michael Carter is expecting an inheritance of $1.25 million in four years.
If he had the money today, he could earn interest at an annual rate of 7.35
percent. What is the present value of this inheritance?
Future value of inheritance expected $1,250,000
Number of years until inheritance 4
Annual interest rate 7.35%
FV
n
i%
PV = FV(FVIF)

STP #5.1. Santiago Hernandez is planning to invest $25,000 in a money market account for
two years. The account pays interest of 5.75 percent compounded on a monthly basis.
How much money will Santiago Hernandez have at the end of two years?
Amount of investment 25,000 $
Term (years) 2
Interest rate per year 5.75%
Frequency of compounding per year 12
Monthly Compounding
PV
n
i%
m
FV = PV(FVIF)
FV
5.37 You will be graduating in two years, and are thinking about your future.
You know that you will want to buy a house five years after you graduate and that you
will want to put down $60,000. As of right now, you have $8,000 in your savings account.
You are also fairly certain that once you graduate, you can go work in the family
business and earn $32,000 a year, with a 5 percent raise every year. You plan to live with
your parents for the first two years after graduation, which will enable you to minimize
your expenses and put away $10,000 each year. The next three years, you will have to live
out on your own as your younger sister will be graduating from college and has
already announced her plan to move back into the family house. Thus, you will be able
to save only 13 percent of your annual salary. Assume that you will be able to invest
savings from your salary at 7.2 percent. At what interest rate will you need
to invest the current savings account balance in order to achieve your goal?
Hint: Draw a time line that shows all the cash flows for years 0 through 7.
Remember, you want to buy a house seven years from now and your first salary will be
in year 3.
Number of years until graduation 2
Number of years until you buy a house 7
Down payment required on house $60,000
Current savings $8,000
Annual income in family business $32,000
Annual raise in salary 5%
Annual savings after graduation while living at home $10,000
Number of years after graduation that you will live at home 2
Annual saving (as a percent of salary)after moving out 13%
Rate of return on invested savings from salary 7.20%
Cash flow 0 1 2 3 4 5 6 7 Future value
Down payment required on house $60,000.00
Current saving $8,000
Salary $32,000
Annual Saving $10,000 $10,000
PVIF @ 7.20% 0.932835821 0.870182669 0.811737564 0.757217877 0.70635996
$9328.36 $8701.83
NPV
FV = PV(FVIF)
Amount that current savings account balance must amount to to reach down payment goal
PV $8,000
FV
n 7
FV = PV (1+ i%)^n
18984.93 = 8,000(1+i%)^7
FV/PV
2.3731 = (1+i%)^7
Raise 2.3731 to 1/7th power
Rate of return that current savings will have to earn to reach goal i%
Year
5.35 Sam Bradford, a number 1 draft pick of the St. Louis Rams,
and his agent are evaluating three contract options. Each option offers a signing bonus
and a series of payments over the life of the contract. Bradford uses a 10.25 percent rate of return
to evaluate the contracts. Given the cash flows for each option, which one
should he choose?
10.25% 10.25% 10.25%
Yea
r
Cash
Flow
Type
Option A Option B Option C
A PVIF PV B PVIF PV C PVIF PV
0 Signing
Bonus
$3,100,000 $4,000,000 $4,250,000
0
1 Annual
Salary
$650,000 $825,000 $550,000
1
2 Annual
Salary
$715,000 $850,000 $625,000
2
3 Annual
Salary
$822,250 $925,000 $800,000
3
4 Annual
Salary
$975,000 $1,250,000 $900,000
4
5 Annual
Salary
$1,100,000 $1,000,000
5
6 Annual
Salary
$1,250,000
6
Interest rate 10.25%
5.36 Surmec, Inc., has reported sales of $2.1 million last year.
The companys primary business line is manufacturing of nuts and bolts.
Since this is a mature industry, the analysts are certain that the sales will grow
at a steady rate of 7 percent a year. The company reports
net income that represents 23 percent of sales. The management would like to buy
a new fleet of trucks but can only do so once the profit reaches $620,000 a year.
At the end of what year will they be able to buy the new fleet of trucks?
What will the sales and profit be that year?
Last year's sales $2,100,000
Annual growth rate of sales expected 7%
Net income as a percent of sales 23%
Target net income needed before fleet of trucks can be purchased 620,000 $
Last years net income = Last Years sales * Net Income as % of sales PV
FV
i%
FV = PV(1+i%)^n
620,000 = 483,000(1.07)^n
FV/PV
1.2836 = (1.07)^n
Trial & Error Method
(1.07) ^ 3.69 = 1.28359
Number of years after which the fleet of truck can be purchased = n =
Sales of the year after which trucks can be purchased = FV = PV (FVIF)
PV
i%
4 n = round up to 4.0
Profit of the year after which trucks can be purchased = #VALUE!
5.34 When you were born your parents set up a bank account in your name
with an initial investment of $5,000. You are turning 21 in a few days
and will have access to all your funds. The account was earning 7.3 percent
for the first seven years then the rates went down to 5.5 percent for six years.
The economy was doing well at the end of the 1990s and your account was
earning 8.2 percent for three years in a row. Unfortunately, the next two
years you earned only 4.6 percent. Finally, as the economy recovered,
your return jumped to 7.6 percent for the last three years.
a. How much money was in your account before the rates went
down drastically (end of year 16)?
b. How much money is in your account now (end of year 21)?
c. What would be the balance now if your parents made another
deposit of $1,200 at the end of year 7?
Initial investment = $5,000
Age at time of investment = 0 years
Current age = 21 years
Interest rate (years 1-7)= 7.30%
Interest rate (years 8-13)= 5.50%
Interest rate (years 14-16)= 8.20%
Interest rate (years 17-18)= 4.60%
Interest rate (years 19-21)= 7.60%
n i% FV
FV at the end of year 7 7 7.30% $1,200.00
FV at the end of year 8 8 5.50% $1,266.00
FV at the end of year 9 9 5.50%
FV at the end of year 10 10 5.50%
FV at the end of year 11 11 5.50%
FV at the end of year 12 12 5.50%
FV at the end of year 13 13 5.50%
FV at the end of year 14 14 8.20%
FV at the end of year 15 15 8.20%
FV at the end of year 16 16 8.20% [a]
FV at the end of year 17 17 4.60%
FV at the end of year 18 18 4.60%
FV at the end of year 19 19 7.60%
FV at the end of year 20 20 7.60%
FV at the end of year 21 21 7.60% [b]
FV at the end of year 21
FV of additional deposits from year 7 thru year 21
FV at the end of year 21 [c]
5.33 You have $12,000 in cash. You can deposit it today in a
mutual fund earning 8.2 percent semiannually, or you can wait,
enjoy some of it, and invest $11,000 in your brothers business in two
years. Your brother is promising you a return of at least 10 percent
on your investment. Whichever alternative you choose, you will need to
cash in at the end of ten years. Assume your brother is trustworthy
and both investments carry the same risk. Which one will you choose?
Alternative A
Cash available for investment = $12,000
Rate of return on mutual fund= 8.20%
Compounding frequency (per year)= 2
Term of investment = 10 years
Alternative B
Cash available for investment after 2 years = $11,000
Rate of return promised by brother = 10%
Compounding frequency (per year)= 1
Term of investment= 8 years
Annual Compounding Semi-annual compounding
PV
i%
m
n
FV
PV
i%
m
n
FV
Choose alternative A
5.32 Patrick Seeley has $2,400 that he is looking to invest.
His brother approached him with an investment opportunity that could double
his money in four years. What interest rate would the investment have to
yield in order for Patricks brother to deliver on his promise?
Patrick's investment = $2,400
Period of investment = 4 years
Value at end of term= $4,800
PV
n
FV
FV = PV(FVIF)
FV/PV = (1+ i%)^n
FV/PV
2.000 = (1+i%)^4

Raise 2.0 to 1/4th power
1.1892 = (1 + i%)
i% =
5.31 You have $2,500 you want to invest in your classmates
start-up business. You believe the business idea to be great and hope to
get $3,700 back at the end of three years. If all goes according to plan,
what will your return on investment be?
Investment needed= 2,500 $
Period of investment= 3 years
Expected terminal value= $3,700
PV
n
FV
FV = PV(FVIF)
3,700= 2,500(1+I%)^3
FV/PV
1.48 = (1+I%)^3
RAISE 1.48 to 1/3rd power
i% =
5.22 Multiple compounding periods: Samantha is looking to invest some money,
so she can collect $5,500 at the end of three years. Which investment
should she make given the following choices:
a. 4.2 percent compounded daily
b. 4.9 percent compounded monthly
c. 5.2 percent compounded quarterly
d. 5.4 percent compounded annually
Amount of money she would like to have after 3 years= $5,500
Term of investment = 3 years
m FV
a. Interest rate= 4.20% Compounding frequency (per year)= 365 i%
n
Amount of investment required today = m
PV
b. Interest rate= 4.90% Compounding frequency (per year)= 12 FV
i%
Amount of investment required today = n
m
PV
FV
c. Interest rate= 5.20% Compounding frequency (per year)= 4 i%
n
Amount of investment required today = m
PV
FV
d. Interest rate= 5.40% Compounding frequency (per year)= 1 i%
n
Amount of investment required today = m
PV
She should invest at 5.4% compounded annually i.e. option D.












5.21 Multiple compounding periods: Find the present value of $3,500
under each of the following rates and periods:
a. 8.9 percent compounded monthly for five years.
b. 6.6 percent compounded quarterly for eight years.
c. 4.3 percent compounded daily for four years.
d. 5.7 percent compounded continuously for three years.
Future value = $3,500 PV = FV(PVIF)
a. Interest rate = 8.90% i%
Term = 5 years n
Compounding frequency (per year)= 12 m
Present value = PV
b. Interest rate = 6.60% i%
Term = 8 years n
Compounding frequency (per year)= 4 m
Present value = PV
c. Interest rate = 4.30% i%
Term = 4 years n
Compounding frequency (per year)= 365 m
Present value = PV
d. Interest rate = 5.70% i%
Term = 3 years n
Compounding frequency (per year)= 100000 m
Present value = PV

5.29. Present value: Caroline Weslin needs to decide whether to accept
a bonus of $1,820 today or wait two years and receive $2,100 then.
She can invest at 6 percent. What should she do?
Bonus offered today = PV = 1,820 $
Bonus after 2 years = FV = 2,100 $
Rate of return = I = 6%
Period = n= 2 years
PV
FV
i%
n
FV=PV(FVIF)
FV =
Since 2,044.95 < 2,100.00
Do not accept the bonus today
PV = FV (PVIF)
PV=
Accept the alternative since it has a higher PV
5.25. Time to grow: Neon Lights Company is a private company with sales
of $1.3 million a year. Management wants to go public but has to wait until the
sales reach $2 million. If sales are expected to grow at a steady 12 percent
annually, when is the earliest that Neon Lights can go public?
Current annual sales = $1,300,000
Sales level at which they can go public= $2,000,000
Expected annual growth rate of sales = 12%
How long will it take for them to reach their goal?
Time = 3.8 years
Alternative method:
Since FV=PV*(1+r)
n
==> n = Ln(FV/PV)/Ln(1+r)
n= 3.8 years
PV
FV
g
FV=PV(1+g)^n
FV/PV
1.5384 = (1.12)^n
Trial & Error Method
1.12 raised to the 3.8 power =
n =
5.24. Time to grow: You are able to deposit $850 in a bank CD today,
and you will withdraw the money only once the balance is $1,000.
If the bank pays 5 percent interest, how long will it take you to attain your goal?
Present value of deposit today = $850
Amount of withdrawal required = $1,000
Interest rate paid by bank per year= 5%
How long will it take to reach your goal?
Time = 3.331 years
Alternative method:
Since FV=PV*(1+r)
n
==> n = Ln(FV/PV)/Ln(1+r)
n= $3.33 years
PV
FV
i%
FV=PV(1+i%)^n
FV/PV
1.1764 = (1.05) ^ n
Trial & Error Method
1.05 raised to 3.331 = 1.176414492
n years
5.23. Time to grow: Zephyr Sales Company has currently reported sales
of $1.125 million. If the company expects its sales to grow at 6.5
percent annually, how long will it be before the company can double
its sales? Use a financial calculator to solve this problem.
Year 0 Sales 1,125,000
Growth rate of sales 6.50% per year
PV
g
FV
FV=PV(1+i%)^n
FV/PV
2.0 =(1.065)^n
Trial & Error Method
n = years
5.28. Growth rate: Infosys Technologies, Inc., an Indian technology company,
reported a net income of $419 million this year. Analysts expect the companys
earnings to be $1.468 billion in five years. What is the expected growth rate in the companys earnings?

Year 0 Net Income = 419,000,000 PV
Year 5 Net Income = 1,468,000,000 FV
Number of years = 5 N

FV = PV(1+i%)^n
FV/PV = (1+i%)^n
FV/PV =
RAISE TO THE 1/5th Power
(FV/PV)^.2 =
EXPECTED g =
Albegraic method:
Since: Year 5 Sales = Year 0 Sales*(1+g)^5
==>g =[ (Year 5 Sales)/(Year 0 Sales)]^(1/5)-1
g = 28.50%
5.27. Growth rates: Xenix Corp had sales of $353,866 in 2011. If management expects its
sales to be at $476,450 in three years, what is the rate at which the companys
sales are expected to grow?
2008 Sales = 353,866 $ PV
2011 Sales= $476,450 FV
Number of years= 3 n
FV=PV(FVIF)
FV/PV=
1.3464 = (1+i%)^3
cube root of 1.3464 =
Growth rate =

5.20. Multiple compounding periods: Find the future value of an investment
of $2,500 made today for the following rates and periods:
a. 6.25 percent compounded semiannually for 12 years
b. 7.63 percent compounded quarterly for 6 years
c. 8.9 percent compounded monthly for 10 years
d. 10 percent compounded daily for 3 years
e. 8 percent compounded continuously for 2 years
Adjusted Data
Present value of investment = $2,500 PV
a. interest rate = 6.25% i%
frequency of compounding= 2 times per year m
term = 12 years n
FV=PV(FVIF)
Future value of investment = FV
b. interest rate = 7.63% i%
frequency of compounding= 4 times per year m
term = 6 years n
FV=PV(FVIF)
Future value of investment = FV
c. interest rate = 8.90% i%
frequency of compounding= 12 times per year m
term = 10 years n
FV=PV(FVIF)
Future value of investment = FV
d. interest rate = 10.00% i%
frequency of compounding= 365 times per year m
term = 3 years n
FV=PV(FVIF)
Future value of investment = FV
e. interest rate = 8.00% i%
frequency of compounding= 1000000 times per year m
term = 2 years n
FV=PV(FVIF)
Future value of investment = FV
5.19. Growth rate: You decide to take advantage of the current online dating
craze and start your own Web site. You know that you have 450 people
who will sign up immediately and, through a careful marketing research and
analysis, determine that membership can grow by 27 percent in the first two years,
22 percent in year 3, and 18 percent in year 4. How many members do
you expect to have at the end of four years?
# of members in Year 0= 450
Growth rate in Years 1-2 27%
Growth rate in Year 3 22%
Growth rate in Year 4 18%
PV
n 0 1 2 3 4
g 0.00% 27.00% 27.00% 22.00% 18.00%
FV members
YEAR 0 1 2 3 4
5.18. Growth rate: CelebNav, Inc., had sales last year of $700,000,
and the analysts are predicting a good year for the start-up, with sales growing
20 percent a year for the next three years. After that, the sales should grow
11 percent per year for two years, at which time the owners are planning
to sell the company. What are the projected sales for the last year
of the companys operation?
Sales in Year 0 $700,000
Growth rate in years 1-3 20%
Growth rate in years 4 and 5 11%
PV
n 0 1 2 3 4 5
g 0.00% 20.00% 20.00% 20.00% 11.00% 11.00%
FV

5.17. Growth rate: Your finance textbook sold 53,250 copies in its first year.
The publishing company expects the sales to grow at a rate of 20 percent for
the next three years, and by 10 percent in the fourth year. Calculate the total
number of copies that the publisher expects to sell in years 3 and 4.
Draw a time line to show the sales level for each of the next four years.
Sales in Year 0 53,250
Growth rate in year 0 0%
Growth rate in years 1-3 20%
Growth rate in year 4 10%
PV
n 0 1 2 3 4
g 0% 20.00% 20.00% 20.00% 10.00%
FV

5.16. Number of periods: You invest $150 in a mutual fund today that pays
9 percent interest annually. How long will it take to double your money?
Present value of investment = 150 $
Rate of interest = 9%
Future value of investment = 300 $
PV
i%
FV
n
FV=PV(1.09)^n
300 = 150(1.09)^n
2.00 = (1.09)^n
1.09^8 = 1.99 or 2.0
n = 8
5.15. Interest rate: You are in a desperate need of cash and turn to your uncle,
who has offered to lend you some money. You decide to borrow $1,300
and agree to pay back $1,500 in two years. Alternatively, you could borrow
from your bank that is charging 6.5 percent interest annually. Should you go with
your uncle or the bank?
Amount borrowed from uncle= 1,300 $
Period of loan = 2
Amount paid back to uncle = 1,500 $
Rate of interest of bank loan = 6.50%
PV
n
FV
i%
FV=PV(1+i%)^n
1,500 = 1,300(1+i%)^2
Divide FV by PV
Revised FV model (FV/PV) = (1+i%)^2
Square root of FV/PV
Square root of FV/PV - 1.0
Decision to Borrow from Bank
5.14. Present value: Elizabeth Sweeney wants to accumulate $12,000 by the
end of 12 years. If the annual interest rate is 7 percent, how much will
she have to invest today to achieve her goal?
Amount of money to be accumulated= 12,000 $
Term of investment = 12
Rate of interest = 7.00%
FV
n
i%

PV=FV(PVIF)
PV
5.13. Present value: You want to buy some bonds that have a value
of $1,000 at the end of seven years. The bonds are said to pay 4.5 percent
interest annually. How much should you pay for them today?
Future value of bonds = 1,000 $
Maturity of bonds = 7
Rate of interest = 4.50%

FV
n
i%

PV=FV(PVIF)
PV
5.12. Present value: Tracy Chapman is saving to buy a house in five years.
She plans to put 20 percent down at that time, and she believes that she will
need $35,000for the downpayment. If Tracy can invest in a fund that pays 9.25 percent annually,
how much will she need to invest today?
Amount needed for down payment = $35,000.00
Number of years until home purchase= 5
Rate of return on fund investment = 9.25%
FV
n
i%
PV=FV(PVIF)
PV
5.11. Present value: You brother has asked you for a loan and has promised
to pay back $7,750 at the end of three years. If you normally invest
to earn 6 percent per year, how much will you be willing to lend to your brother?
Expected rate of return = 6.00%
Term of loan = 3 years
Future payment to be received = 7,750 $
i%
n
FV
PV=FV(PVIF)
PV =
5.10. Present value: Maria Addai has been offered a future payment of
$750 two years from now. If she can earn 6.5 percent
compounded annually on her investment, what should she pay for this
investment today?
Opportunity cost 6.50%
Term = 2 years
Future payment to be received 750 $

i%
n
FV
PV=FV(PVIF)
PV =
5.9. Present value: Roy Gross is considering an investment that pays 7.6 percent.
How much will he have to invest today such that the investment will be worth
$25,000 in six years?
Rate of return= 7.60%
Term = 6 years
Terminal value = 25,000 $

i%
n
FV
PV=FV(PVIF)
PV =

5.8. Growth rates: Joe Maur, a catcher for the Minnesota Twins is
expected to hit 15 home runs in 2012. If his home-run-hitting ability is
expected to grow by12 percent every year for the following five years,
how many home runs is he expected to hit in 2017?
Number of home runs expected in 2007= 15
Growth rate in hitting home runs = 12%
Number of years of growth = 5

PV
g
n
FV=PV(FVIF)
FV =

Home runs
5.7. Multiple compounding periods: Find the future value of an investment of $100,000
made today for five years and paying 8.75 percent for the following compounding periods:
a. Quarterly
b. Monthly
c. Daily
d. Continuous
Investment = 100,000 $
Interest rate= 8.75%
Term = 5
Compound Period m
Quarterly Compounding Monthly Compounding Daily Copounding Continuous Compounding
a b c d
PV
i%
n
m


FV=PV(FVIF) FV=PV(FVIF) FV=PV(FVIF) FV=PV(FVIF)
5.6. Future value: Your birthday is coming up and instead of any presents,
your parents promised to give you $1,000 in cash. Since you have a part-time job
and, thus, dont need the cash immediately, you decide to invest the money
in a bank CD that pays 5.2 percent quarterly for the next two years.
How much money can you expect to gain in this period of time?
Amount received as a gift= 1,000 $
Interest rate (per year)= 5.20%
Frequency of compounding per year = 4
Term of investment (years)= 2
Annually Quarterly
Compounded Compounded
PV
i%
n
m
FV=PV(FVIF)
FV =
5.5. Future value: Your bank pays 5 percent interest semiannually on your
savings account. You dont expect the current balance of $2,700 to change over
the next four years. How much money can you expect to have at the end of this period?
Rate of interest = 5.00%
Current balance= 2,700 $
Term (years)= 4
Frequency of compounding (per year)= 2

Annually Semi-annually
Compounded Compounded
i%
PV
n
m
FV=PV(FVIF)
FV =
5.4. Future value: Kate Eden received a graduation present of $2,000 that she
is planning on investing in a mutual fund that earns 8.5 percent each year.
How much money can she collect in three years?
Graduation gift = 2,000 $
Rate of return per year = 8.50%
Period of investment = 3 years

PV
i%
n
FV=PV(FVIF)
FV =

5.2. Future value: Ted Rogers is investing $7,500 in a bank CD that pays a 6 percent
annual interest. How much will the CD be worth at the end of five years?
Present value of investment $7,500
Rate of return per year 6.00%
Term (years) 5
Compounding per year 1

PV
i%
n
m
FV=PV(FVIF)
FV =

5.3. Future value: Your aunt is planning to invest in a bank deposit that will pay
7.5 percent interest semiannually. If she has $5,000 to invest, how much will she
have at the end of four years?
Present value of investment $5,000
Interest rate per year 7.50%
Term (years) 4
Compounding frequency 2
Annually Semiannually
Compounded Compounded
PV
i%
n
m
FV=PV(FVIF)
FV =
#5.26 Time to Grow: You have just inherited $550,000. You plan to save this money and continue to
live off the money that you are earning in your current job. If the $550,000 is everything that you
have other than an old car and some beat-up furniture, and you can invest the money in a bond
that pays 4.6 percent interest annually, how long will it be before you are a millionaire?
PV given
i% given
FV given
n = ? Trial&Error
PV FVIF FV FV
Prove this FV to find n

Time to Grow: You have just inherited $550,000. You plan to save this money and continue to
live off the money that you are earning in your current job. If the $550,000 is everything that you
have other than an old car and some beat-up furniture, and you can invest the money in a bond
that pays 4.6 percent interest annually, how long will it be before you are a millionaire?
Prove this FV to find n
#5.30 Refer to problem 5.29. Congress and the president have decided to increase the Federal tax rate in an
effort to reduce the budget deficit. Suppose that Caroline Weslin will pay 35 percent of her bonus
to the Federal government for taxes if she accepts the bonus today and 40 percent if she receives
her bonus in two years. Will the increase in tax rates affect her decision?
Refer to problem #5.29
Her bonus today is $1,820 today
She will pay 35.00% in taxes if she accepts the bonus today
She will pay $637.00 in taxes.
Net cash flow today is $1,183.00 PV of left over amount.
Assume she receives her bonus of $2,100.00 two years from
Year Bonus CF PVIF PV
0
1
2 $2,100
40.00% She will pay
She will pay this in taxes
PV of left over amount
Yes, it make a difference if the tax rate increases. Note the differences in the two present values.
Accepting the bonus today and paying the current tax rate is the most advantangeous decision.
Refer to problem 5.29. Congress and the president have decided to increase the Federal tax rate in an
effort to reduce the budget deficit. Suppose that Caroline Weslin will pay 35 percent of her bonus
to the Federal government for taxes if she accepts the bonus today and 40 percent if she receives
her bonus in two years. Will the increase in tax rates affect her decision?
in taxes if she accepts the bonus today
today and a discount rate of 6.00%
in taxes if she accepts bonus 2 years from now.
She will pay this in taxes
PV of left over amount
Yes, it make a difference if the tax rate increases. Note the differences in the two present values.
Accepting the bonus today and paying the current tax rate is the most advantangeous decision.
5.1. Future value: Chuck Tomkovick is planning to invest $25,000 today in a mutual
fund that will provide a return of 8 percent each year. What will be the
value of the investment in ten years?
Present value of investment $25,000
Rate of return per year 8.00%
Term (years) 10
Compounding per year 1

PV
i%
n
m
FV=PV(FVIF)
FV =