Time Value of Money

TIME VALUE OF MONEY
32. Determine how much $1,000 deposited in a savings account paying 8% (compounded
annually) will be worth after 5 years.
a. $5,526
b. $ 784
c. $1,400
d. $1,469
ANS: D
All problems use Tables I - IV in the back of the book unless otherwise stated.
Solution:
FV5 = PV0(FVIF.08,5) = 1,000(1.469) = $1,469
PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

LOC: Understand time value of money TOP: Future value
33. The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a
nine year time period. Determine the compound annual growth rate.
a. 11.1%
b. 8%
c. 22.2%
d. 100%
ANS: B
Solution: PVIFi,9 = $2.00/$4.00 = 0.500. i = 8% from Table II.

LOC: Understand time value of money TOP: Calculation of compound growth rate
34. Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to
generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return
Comet expects to earn from this equipment.
a. 16.3%
b. 62.7%
c. 10%
d. 20%
ANS: C
Solution:
$100,000 = $16,273(PVIFAi,10)
PVIFAi,10 = 6.145
Therefore, i = 10% from Table IV

LOC: Understand time value of money TOP: Present value of an annuity
35. Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an
equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live
to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his
61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period
of time. Determine the size of the annual deposits that must be made by Mr. Moore.
a. $212,850
b. $23,449
c. $2,164
d. $8,514
ANS: C
Solution:
PVAN = PMT(PVIFA0.10,20) = $25,000(8.514)
= $212,850 needed on 60th birthday
$212,850 = PMT(FVIFA0.10,25) = PMT(98.347)
PMT = $2,164

36. Determine (to the nearest dollar) the amount you would be willing to pay for a $1,000 par value bond
paying $80 interest each year and maturing in 12 years, assuming you wanted to earn a 9 percent rate
of return.
a. $929
b. $573
c. $1,316
d. $1,960
ANS: A
Solution:
PV0 = $80(PVIFA0.09,12) + $1000(PVIF0.09,12)
= $80(7.161) + $1000(.356) = $928.88

LOC: Understand time value of money TOP: Bond valuation
37. Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely
and never matures (i.e. a perpetuity), assuming you require an 8 percent rate of return on this
investment.
a. $480
b. $743
c. $1,000
d. $750
ANS: D
Solution:
PVPER = PMT/i = $60/.08 = $750

LOC: Understand time value of money TOP: Perpetuity
38. Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The
lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12
years. Determine the present value of the lease payments if the opportunity cost of funds is 14 percent.
a. $2,830,000
b. $13,635,500
c. $6,000,000
d. $3,226,200
ANS: D
Solution:
PVAND = PMT [PVIFAi,n(1+i)] ; n = 12; i = 0.14; PMT = $500,000
= $500,000[5.660(1+.14)] = $3,226,200

LOC: Understand time value of money TOP: Present value of an annuity due
39. If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded
annually, determine how much the CD will be worth at the end of 4 years.
a. $13,600
b. $45,730
c. $14,640
d. $15,958
ANS: C
Solution:
FV4 = PV0(FVIFi,n); PV0 = $10,000; n = 4; i = 0.10
= $10,000(1.464) = $14,640

41. Your grandparents put $1,000 into a savings account for you when you were born 20 years ago. This
account has been earning interest at a compound rate of 7 percent. What is its value today?
a. $3,870
b. $1,967
c. $3,026
d. $3,583
ANS: A
Solution:
FV20 = $1000(3.870) = $3,870

43. You have just won a $50,000 bond that pays no interest and matures in 20 years. If the discount rate is
10%, what is the present value of your bond?
a. $7,450
b. $8,175
c. $8,900
d. $1,490
ANS: A
Solution:
PV = $ 50,000(0.149) = $7,450

LOC: Understand time value of money TOP: Present value
44. BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years. What rate
is the bank charging you?
a. 10%
b. 11%
c. 12%
d. 13%
ANS: C
Solution:
PVIFi,3 = $30,000/$42,135 = 0.712; or 12% from Table II

45. The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years.
What is the future value of this lottery if you plan to put each payment in an account earning 9
percent?
a. $2.28 million
b. $12.79 million
c. $14.32 million
d. $ 5.00 million
ANS: B
Solution:
FVAN 20 = $250,000(51.160) = $12,790,000

LOC: Understand time value of money TOP: Future value of an annuity
46. Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year
working life and then retire. What will Billy have if the account will earn 10 percent compounded
annually?
a. $394,786
b. $ 23,470
c. $1,062,223
d. $810,917
ANS: C
Solution:
FVAN40 = $2,400(442.593) = $1,062,223

47. Jane wants to have $200,000 in an account in 20 years. If her account earns 11 percent per annum over
the accumulation period, how much must she save per year (end of year) to have the $200,000?
a. $25,116
b. $3,115
c. $10,000
d. $3,492
ANS: B
Solution:
PMT = $200,000/64.203 = $3,115

48. Many IRA funds argue that investors should invest at the beginning of the year rather than at the end.
What is the difference to an investor who invests $2,000 per year at 11 percent over a 30 year period?
a. $43,785
b. $36,189
c. $54,244
d. There is no difference
ANS: A
Solution:
FVAN30 = $2,000(199.021) = $398,042
FVAND30 = $2,000(199.021)(1.11) = $441,827
Difference = $43,785

LOC: Understand time value of money TOP: Future value of an annuity and an annuity due
49. An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years.
They claim your return on the annuity is 9 percent. What should you be willing to pay today for this
annuity?
a. $429,600
b. $438,144
c. $408,672
d. $398,144
ANS: B
Solution:
PVAN = $48,000(9.128) = $438,144

50. New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end
of year) for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected
rate of return?
a. 8%
b. 9%
c. 7%
d. 10%
ANS: C
Solution:
PVIFA = $109,296/$12,000 = 9.108; or 7% from Table IV

51. Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The
loan requires five equal annual end of the year payments. If the loan provides the bank with a 12
percent return, what will be your annual payments?
a. $5,548
b. $3,148.12
c. $6,000
d. $1,666.67
ANS: A
Solution:
PMT= $20,000/3.605 = $5,547.85
52. Idlewild Bank has granted you a seven year loan for $50,000. If your seven annual end of the year
payments are $11,660.45, what is the rate of interest Idlewild is charging?
a. 14%
b. 23%
c. 12.6%
d. 11%
ANS: A
Solution:
PVIFA = $50,000/$11,660.45 = 4.288; or 14% from Table IV

53. Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning of
the year payments that will fully amortize the cost of the car. What is the amount of the payments if
the interest rate is 12 percent?
a. $6,810.99
b. $7,766.99
c. $6,423.74
d. $6,081.25
ANS: D
Solution:
PMT = $28,000 / (4.111)(1.12) = $6,081.25

LOC: Understand time value of money TOP: Present value of annuity due
54. The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end
of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of
lease payments?
a. $130,872
b. $149,194
c. $142,710
d. $264,000
ANS: B
Solution:
PVAND = $24,000(5.453)(1 + 0.14) = $149,194

55. Alabama Power has preferred stock that pays an annual dividend of $9.44. If the security has no
maturity, what is it's value to an investor who wishes to obtain a 9 percent rate of return?
a. $84.96
b. $104.89
c. $95.34
d. $94.40
ANS: B
Solution:
PVPER = $9.44/0.09 = $104.89

LOC: Understand time value of money TOP: Perpetuity
56. Designs Now is opening a showcase office to display and sell it's computer designed poster art.
Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in
the third year. If Designs uses 11 percent as its discount rate, what is the present value of the cash
flows?
a. $429,720
b. $457,620
c. $456,000
d. $424,820
ANS: A
Solution:
PV = $120,000 (0.901) + $180,000(0.812) + $240,000(0.731) = $429,720

LOC: Understand time value of money TOP: Present value of unequal cash flows
60. John is 25 years old and wishes to retire in 30 years. His plan is to invest in a mutual fund earning a 12
percent annual return and have a $1 million retirement fund at age 55. How much must he invest at the
end of each year to achieve this goal?
a. $7,499.96
b. $5,024.60
c. $4,143.65
d. $33,333.33
ANS: C
Solution:
PMT = $1,000,000 / 241.333 = $4,143.65

61. Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that
he would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money
now. He has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to
make if Joe accepts the offer?
a. less than 1%
b. 15%
c. 18%
d. 12%
ANS: B
Solution:
PVIFA = $140,827/$22,500 = 6.259; or 15% from Table IV

62. A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual,
end-of-year payments that include both principal and interest on the outstanding balance. Determine
the amount of these annual payments (to the nearest dollar).
a. $2,000
b. $3,100
c. $2,706
d. $1,100
ANS: C
Solution:
PVANo = $10,000; n = 5; i = 11%
PVANo = PMT(PVIFAi,n )
$10,000 = PMT(PVIFA0.11,5 ) = PMT(3.696)
PMT = $2,706

64. If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12%
annual return, how much will you have at retirement in 40 years?
a. $909,090
b. $930,510
c. $783,879
d. $510,285
ANS: B
Solution:
FV = 10,000 (93.051) = $930,510

65. Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of
the accident. What is the present value (at the time of the accident) of the payment? Assume interest
rates are 9%.
a. $153,900
b. $ 68,100
c. $ 65,000
d. $ 70,800
ANS: C
Solution:
PV = 100,000 (.65) = $65,000

67. What is the most you should pay to receive the following cash flows if your required rate of return is
12 percent?
Year 1 $5,000
Year 2 $8,000
Year 3 $12,000
Year 4-10 $15,000
a. $58,580
b. $104,135
c. $68,105
d. $40,000
ANS: C
Solution:
PV =$ 5,000(0.893) + $8,000(0.797) + $12,000(0.712) + $15,000(5.650 - 2.402) = $68,105
PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

LOC: Understand time value of money TOP: Present value of unequal cash flows
68. Seebee makes quarterly (end of period) payments of $30,000 into a pension fund earning 12 percent
per year compounded quarterly for 10 years. How much interest will they have earned in 10 years?
a. $2,262,030
b. $2,105,880
c. $905,880
d. $1,062,030
ANS: D
Solution:
FVAN40 = $30,000 (75.401) = $2,262,030
Fund balance after 10 years of $2,262,030 less Payments of $1,200,000 results in Interest = $1,062,030

69. John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent,
and he will pay off the loan in 10 equal, annual, end of year payments, how much total interest will he
pay?
a. $7,173.90
b. $2,717.39
c. $12,000.00
d. $25,924.23
ANS: A
Solution:
PMT = $20,000/7.360 = $2,717.39; Total payments = $27,173.90
I = $27,173.90 - $20,000 = $7,173.90

70. Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21
years old. If the fund earns 10 percent interest compounded annually, what is the value of the fund
today?
a. $104,602
b. $6,575
c. $5,975
d. $6,875
ANS: C
Solution:
PV = $25,000(0.239) = $5,975
72. Jackie plans to open her own book store in 10 years. To raise the "seed" money she has committed
$10,000 she now has in a mutual fund. In addition, she plans to save $2,000 per year (end of year) for
the next 5 years and $3,000 per year (end of year) for the following 5 years. How much "seed" money
will Jackie have in 10 years if the investments earn 10 percent per year compounded annually?
a. $76,129
b. $63,925
c. $44,255
d. $159,370
ANS: B
Solution:
FV = $10,000(2.594) + $2,000(6.105)(1.611) + $3,000(6.105) = $63,925

LOC: Understand time value of money TOP: Future value of single amounts and annuities
77. How much will you have at the end of 5 years in a European vacation account if you deposit $200 a
month in an account that is paying a nominal 12 percent per year, compounded monthly?
a. $16,334
b. $15,247
c. $16,497
d. $15,817
ANS: A
Solution: FVAN =$200(81.670) = $16,334

78. You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund earns about 11
percent per year and that is where you put your savings. How much must you save each year to obtain
your goal?
a. $20,000.00
b. $ 3,749.98
c. $ 4,370.13
d. $ 2,000.00
ANS: C
Solution:
500,000 = PMT(114.413)
PMT = $4,370.13

79. You plan to lease a Saab automobile that sells for $22,657 and has no salvage value. If the monthly
lease is $499, with the first of 60 payments due immediately. What is the implied annual interest rate
on your lease?
a. 10%
b. 11.5%
c. 12%
d. 13.5%
ANS: C
Solution:
PVAND = 499(44.955)(1.01) = $22,656.87
The above solution came by either using a trial and error method (using 1%/month or 12%/yr) or a
financial calculator to obtain 12% per year.

85. Keith Stone has a 10-year old daughter, Kate, who will be entering college in 8 years. Keith estimates
college costs to be $16,000, $17,000, $18,000 and $19,000 payable at the beginning of each of Kate's
four years in college. How much must Keith save each year (assume end of year payments) for each of
the next 8 years to have enough savings to pay for Kate's education? Assume Keith can earn 9% on his
savings.
a. $5,569
b. $7,720
c. $5,108
d. $7,677
ANS: A
Solution:
Year Present Value

1 $16,000(1.000) = $16,000
2 17,000(0.917) = 15,589
3 18,000(0.842) = 15,156
4 19,000(0.772) = 14,668
$61,413
PMT = $61,413/11.028 = $5,569

LOC: Understand time value of money TOP: Combination problem
90. Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special
account. The new bus is expected to cost $180,000. How much must Cosmos put into the fund in
equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter?
a. $12,107
b. $11,465
c. $9,901
d. $14,727
ANS: B
Solution:
$180,000 = PMT(4.506)(1.772) + PMT(7.716)
$180,000 = PMT(15.7006)
PMT = $11,465

103. Jenny Genius wants to purchase a new car. She knows that she can afford to pay $250 per month and
that her bank will charge her 8% interest on the car loan. She intends to pay off the car in five years.
Of the following, which is the most expensive vehicle in her price range that she could consider?
a. A Taurus selling for $11,900
b. A Malibu selling for $12,320
c. A Civic selling for $14,670
d. A Celica selling for $17,500
ANS: B
Solution using a calculator:
N = 5 X 12
I = 8 ÷ 12
PMT = $250
Solve for PV
The most she could pay for a car is $12,329.61.

104. Bill Swill decides to try his luck at Powerball where the projected winnings are $12,000,000. If he
wins, he can choose the annuity option (to be paid over 20 years) or a lump sum settlement that he can
invest at 8% interest. How much must the lump sum option be to make the lump sum option equal to
the annuity option (rounded)?
a. $2,574,578
b. $1,743,620
c. $1,130,668
d. $1,200,000
ANS: A
Solution using a calculator:
N = 20
I=8
FV = $12,000,000
Solve for PV
$2,574,578.49 by calculator.
PTS: 1 OBJ: TYPE: E. Prob. NAT: Reflective thinking


Time Value of Money

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Time Value of Money

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TIME VALUE OF MONEY

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

Year Present Value

PMT = $61,413/11.028 = $5,569

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob. NAT: Reflective thinking

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