FMAx Module 0

Basic Financial Mathematics

0.2 You deposit $500 at 6 percent for 181 days. What is the end balance (future value) you will h
Present Value $500.00
Interest rate 6%
Term (days) 181
Future Value

0.4 If you invest $500 today and get $550 in 270 days, what is the interest rate paid on the accou
PV $500.00
FV $550.00
Term (days) 270
Interest rate

0.5 Mr. Smith deposits $1,000 into a savings account that pays 5 percent interest compounded a
PV $1,000.00
Interest rate 5%
Term (years) 4
FV

0.6 A financial asset that pays $1,000 in 3 years has a market value today of $650. What is the in
PV $650.00
FV $1,000.00
Term (years) 3
Interest rate

0.7 A company can invest $1,000 in an account that pays an interest rate of 3% compounded an
(Hint: use logarithms to compute t, and if the answer is a fractional number, round up to the n

PV $1,000.00
FV $1,500.00
Interest rate 3%
Term (years)

0.8 Mr. Smith deposits $1,000 into a savings account that pays 5 percent interest with monthly co
PV $1,000.00
Interest rate 5%
 Term (years) 4
FV

0.9 What is the effective interest rate of an investment that offers a nominal rate of 15 percent co
Nominal interest 15%
Frequency 12
Effective Rate

0.10 What are the interest gains on $100 deposited over 5 years at 6% rate compounded quarterly
PV $100
Nominal interest 6%
Term (years) 5
Frequency 4
Interest gains

0.11 Which of these two alternatives offers the highest return? a) 13% APR with monthly compoun
Option A Option B
APR 13% 13.30%
Frequency 12 2
Effective interest
She should prefer:

0.12 Ms. Woodhouse is selling her property and has received two offers:
(1) a cash payment of $220,000, or
(2) a payment of $240,000 one year from now.

Which offer should she accept, given that she can invest funds today at an interest rate of 6 p
(Hint: compare the present values of the two options)

Offer 1 Offer 2
PV
She should accept:

0.13 If the discount rate is 8 percent, which of the following two options would you prefer to receive
Option 1: $10,000 today
Option 2: $13,000 in 3 years
Option 1 Option 2
PV

0.14 A company can invest in a new technology that costs $500,000 and will provide yearly cost s
financially profitable if the company finances it with a bank loan at the 5% interest rate?
(Hint: we treat the cost savings in the same way as a positive cash flow and assess the inves
 Investment ($500,000)
Yearly savings Note:
C
Time (years) 20 NPV  CF0 
Interest 5.00%
NPV

0.15 What is the net present value of an investment that requires you to pay $4,000 today, then pa
discount rate of 5 percent.

Discounted
Year Cash Flow Discount factors cash flows
0
1
2
3
4
5
6
7

Discount rate 5%
NPV

0.16 What is the internal rate of return (IRR) of an investment that offers the following cash flows?
Year Cash Flow
0 -$2,000.00
1 $1,000.00
2 $1,000.00
3 $3,000.00

IRR

0.17 Mr. Ferrari wants to save $4,500 for the down payment to purchase a new car two years from
account that pays 4 percent per year compounded monthly?

FV $4,500
Time (years) 2
Interest rate 4%
Frequency 12.00
PV

0.18 Compute the future value of $100 for: (A) 10 years at 5 percent compounded annually; (B) 10
compounded monthly. Which one offers the largest value at the end of the tenth year?

Option A Option B Option C

 PV $100 $100 $100
Time (years) 10 10 10
Interest rate 5.00% 4.50% 4.00%
Frequency 1 4 12
FV
Most profitable:

0.19 A company is considering executing a project that requires an investment of $10,000 and wo
internal rate of return of this project.
(Hint: below we provide two methods for calculating the IRR: using the Excel IRR function, or
Using Goal Seek Using the IRR form

PV
Cash Flows
Time (years)
NPV
IRR IRR

0.20 Which of the two financial alternatives produces has the highest internal rate of return? A) An
plus $20,000 at the end of the fifth year, or B) an investment of $120,000 that pays $30,000 p

Period (semi-annual) Alternative A Period (years) Alternative B

0 -$100,000 0 -$120,000
1 $10,000 1 $30,000
2 $10,000 2 $30,000
3 $10,000 3 $30,000
4 $10,000 4 $30,000
5 $10,000 5 $30,000
6 $10,000
7 $10,000
8 $10,000
9 $10,000
10 $30,000

IRR
IRR annual
ance (future value) you will have in the account at maturity?

terest rate paid on the account?

rcent interest compounded annually. What will be the balance in the account 4 years from now?

today of $650. What is the interest rate on this investment assuming annual compounding?

rate of 3% compounded annually. How many years will the company need to keep the investment to accumulate at
al number, round up to the next integer: i.e., if answer is 2.2 years round to 3 years, and so on).

rcent interest with monthly compounding. What will be the balance in the account 4 years from now?
 ominal rate of 15 percent compounded monthly?

% rate compounded quarterly?

% APR with monthly compounding, or b) 13.3 APR with semi-annual compounding?

oday at an interest rate of 6 percent?

s would you prefer to receive?

and will provide yearly cost savings of $40,000 during the next 20 years. Will this investment be
at the 5% interest rate?
sh flow and assess the investment’s financial profitability by its NPV).
 CF  1 
NPV  CF0  * 1  T 
i  (1  i ) 

to pay $4,000 today, then pays back $800 for the next 6 years plus 4,800 at the end of year 7? Use a

ers the following cash flows?

ase a new car two years from now. How much money does he need to deposit today into a bank

ompounded annually; (B) 10 years at 4.5 percent compounded quarterly; (C) 10 years at 4.0 percent
end of the tenth year?
vestment of $10,000 and would produce yearly flows of $2,500 over the next 8 years. Compute the

ng the Excel IRR function, or finding through Goal Seek the rate that makes NPV = 0)
Using the IRR formula

Year Cash Flows

0
1
2
3
4
5
6
7
8

internal rate of return? A) An investment of $100,000 that pays $10,000 semi-annually during 5 years
120,000 that pays $30,000 per year durig 5 years.
ment to accumulate at least $1,500.