CHP.3.

THE TIME VALUE OF MONEY

1. What is the future value of $10,000 on deposit for five years at 6% simple interest?
A) $7,472.58
B) $10,303.62
C) $13,000.00
D) $13,382.26

Answer: C Difficulty: Medium Page: 59, 6th paragraph.

FV = PV + (PV x r x t)
(10,000) + ((10,000 x .06) x 5) = $13,000.00

2. How much will accumulate in an account with an initial deposit of $100, and which
earns 10% interest compounded quarterly for three years?
A) $107.69
B) $133.10
C) $134.49
D) $313.84

Answer: C Difficulty: Medium Page: 61, Table 3.2.

FV = PV (1+r)t
100 (1.025)12 = 134.49

3. How much can be accumulated for retirement if $2,000 is deposited annually,

beginning one year from today, and the account earns 9% interest compounded
annually for 40 years?
A) $ 87,200.00
B) $675,764.89
C) $736,583.73
D) $802,876.27

Answer: B Difficulty: Medium Page: 83, Table 3.5.

 (1.09)40  1
PV = 2000  
 .09 
 
= 2000 x 337.8824
=$675,764.89

4. Assume the total expense for your current year in college equals $20,000.
Approximately how much would your parents have needed to invest 21 years ago in
an account paying 8% compounded annually to cover this amount?
A) $ 952
B) $1,600
C) $1,728
D) $3,973

Answer: D Difficulty: Medium Page: 61, Table 3.2.

 $20,000 = x(1.08)21
$20,000 = 5.0338x
$3,973.12 = x

5. What is the present value of your trust fund if it promises to pay you $50,000 on your
30th birthday (7 years from today) and earns 10% compounded annually?
A) $25,000.00
B) $25,657.91
C) $28,223.70
D) $29,411.76

Answer: B Difficulty: Medium Page: 91, 5th paragraph.

$50,000
PV =
1.10  7
$505,000
=
1.9487
= $25,657.91

6. What is the present value of the following payment stream, discounted at 8%

annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the
end of year 3?
A) $5,022.11
B) $5,144.03
C) $5,423.87
D) $5,520.00

Answer: A Difficulty: Medium Page: 73, Figure 3.7.

1000 2000 3000
PV =  1.08   
1.08  2  1.08  3
= 925.93 + 1,714.68 + 2,381.50
= $5,022.11

7. What is the present value of a four-period annuity of $100 per year that begins two
years from today if the discount rate is 9%?
A) $297.21
B) $323.86
C) $356.85
D) $388.97

Answer: A Difficulty: Hard Page: 77, Table 3.4.

 1 1 
PV1 = 100   4
 .09 .09(1.09) 
= 100 [11.111 – 7.8714]
PV1 = 323.97

323.97
PV0 = 1.09

= $297.21
8. How much must be invested today in order to generate a five-year annuity of $1,000
 per year, with the first payment one year from today, at an interest rate of 12%?
A) $3,604,78
B) $3,746.25
C) $4,037.35
D) $4,604.78

Answer: A Difficulty: Medium Page: 72, 3rd paragraph.

 1 1 
PV = $1,000   5 
 .12 .12(1.12) 
= 3,604.78

9. The salesperson offers, “Buy this new car for $25,000 cash or, with appropriate down
payment, pay $500 per month for 48 months at 8% interest.” Assuming that the
salesperson does not offer a free lunch, calculate the “appropriate” down payment.
A) $1,000.00
B) $4,520.64
C) $5,127.24
D) $8,000.00

Answer: B Difficulty: Medium Page: 73, 2nd paragraph.

 1 1 
PV = $500   

 .0067 .00667(1.00667) 48


= $500 [149.925 – 108.9663]
= $500 [40.9587]
= $20,479.36
A difference of $4,520.64 exists between cash price and loan value. This should be
the downpayment.

10. What is the present value of a five period annuity of $3,000 if the interest rate is 12%
and the first payment is made today?
A) $9,655.65
B) $10,814.33
C) $12,112.05
D) $13,200.00

Answer: C Difficulty: Medium Page: 76, 2nd paragraph.

 1 1 
PV = 3,000    +3000
 .12 .12(1.12) 4 


= 3,000 [8.33 – 5.296) + 3,000
= $12,112.05