Ashesi University

Introduction to Finance
Time Value of Money
1. Your brother has offered to give you either $60,000 today or $100,000 in 12 years. If the
interest rate is 6% per year, which option is preferable?

2. What is the present value of $4000 paid at the end of each of the next 73 years if the interest
rate is 3% per year?

3. You are 23 years old and decide to start saving for your retirement. You plan to save $5500 at
the end of each year (so the first deposit will be one year from now), and will make the last
deposit when you retire at age 65. Suppose you earn 10% per year on your retirement savings.
a. How much will you have saved for retirement? b. How much will you have saved if you wait
until age 39 to start saving (again, with your first deposit at the end of the year)?

4. Your grandmother has been putting $2000 into a savings account on every birthday since your
first (that is, when you turned one). The account pays an interest rate of 4%. How much money
will be in the account on your eighteenth birthday immediately after your grandmother makes
the deposit on that birthday?

5. Your biotech firm plans to buy a new DNA sequencer for $500,000. The seller requires that you
pay 20% of the purchase price as a down payment, but is willing to finance the remainder by
offering a 48-month loan with equal monthly payments and an interest rate of 0.5% per month.
What is the monthly loan payment

6. Ellen is 35 years old, and she has decided it is time to plan seriously for her retirement. At the
end of each year until she is 65, she will save $10,000 in a retirement account. If the account
earns 10% per year, how much will Ellen have saved at age 65?

7. You are the lucky winner of the $30 million state lottery. You can take your prize money either
as (a) 30 payments of $1 million per year (starting today), or (b) $15 million paid today. If the
interest rate is 8%, which option should you take?

8. You want to endow an annual MBA graduation party at your alma mater. You want the event to
be a memorable one, so you budget $30,000 per year forever for the party. If the university
earns 8% per year on its investments, and if the first party is in one year’s time, how much will
you need to donate to endow the party?