CHAP.

61 TIME VALUE OF MONEY 165

Solved Problems

6.1 Future Value. Compute the future values of ( a ) an initial $2,000 compounded annually for 10
years at 8 percent; (6) an initial $2,000 compounded annually for 10 years at 10 percent; (c) an
annuity of $2,000 for 10 years at 8 percent; and ( d ) an annuity of $2,000 for 10 years at 10
percent.
SOLUTION
(a) To find the future value of an investment compounded annually, use:
F,,= P(l + i)" = P *FV1Fj.n
In this case, P = $2,000, i = 8%, n = 10, and FVIF8%,10yr
= 2.1589. Therefore,

Flo = $2,000(1 + 0.08)'O = $2,000(2.1589) = $4,317.80

(6) F,,= P(1+ i)" = P.FVIFi,,

Here P = $2,000, i = 10%, n = 10, and FVIFlo,lo= 2.5937. Therefore,
F1o = $2,000(1 + 0.10)'O = $2,000(2.5937) = $5,187.40
(c) For the future value of an annuity, use:
S, = A * FVIFAj,,
In this case A = $2,000, i = 8%, n = 10, and FVIFA8%,loyr= 14.486. Therefore,
Slo = $2,000(14.486) = $28,972
(4 S, = A * FVIFA,,,
Here, A = $2,000, i = 10%, and FVIFAlo~lo
= 15.937. Therefore,

Slo = $2,000(15.937) = $31,874

6.2 Intrayear Compounding. Calculate how much you would have in a savings account 5 years
from now if you invest $1,000 today, given that the interest paid is 8 percent compounded:
( a ) annually; ( b ) semiannually; ( c ) quarterly; and ( d ) continuously.
SOLUTION
A general formula for intrayear compounding is:
F,,= P(l + Um)'"'' = P.FVIFi,,,t,,,,,,,

For this problem P = $1,000 and n = 5 years.

(a) When m = 1, i = 8%, and FVIF(8%/l),S.l
= 1.4693,

F5 = $1,000( 1 + y)5'1 = $1,000(1.4693) = $1,469.30

(6) When rn = 2 and FVIF(8%12),5.2

= FVIF4,10= 1.4802,
F5 = $1,000(1.4802) = $1,480.20
(c) m =4 and FVIF(8%/4),5.4
= FVIF2,20= 1.4859,

F5 = $1,000(1.4859) = $1,485.90
(d) For continuous compounding, use:
F,, = p . e""
Fs = $1,000(2.71828)0~08'5= $1,000(2.71828)0'4
= $1,000(1.4918) = $1,491.80