SMApp B

Appendix B - Time Value of Money
Appendix B
Time Value of Money
QUICK STUDIES
Quick Study B-1 (10 minutes)
1. 2% n = 8 periods
2. 12% n = 2 periods
3. 3% n = 4 periods
4. 1% n = 24 periods
In Table B.1, where n = 15 and p = $2,745/$10,000 = 0.2745, the i = 9%.
In Table B.1, where i = 6% and p = $6,651/$10,000 = 0.6651, the n = 7.
In Table B.1, where n = 5 and i = 9%, the p = 0.6499.
Amount willing to pay today: 0.6499 x $140,000 = $90,986
In Table B.2, where n = 10 and i = 12%, the f = 3.1058.
Cash proceeds at liquidation: 3.1058 x $630,000 = $1,956,654
AppB-1999
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Amount willing to pay for the project: 4.7665 x $150,000 = $714,975
Ending value of the investment program: 164.494 x $1,500 = $246,741
EXERCISES
Exercise B-1 (15 minutes)
Present value of investment = $606,773 x .5645 = $342,523
Amount borrowed = present value of $20,000 at 10% for 3 years

= $20,000 x 0.7513 (using Table B.1, i = 10%, n = 3)
= $15,026
In Table B.2, where i = 12% and f = $96,463/$10,000 = 9.6463, the n = 20

(implies the investor must wait 20 years before payment).
In Table B.2, where n = 25 and f = $108,347/$10,000 = 10.8347, the i = 10%

(investor must earn 10% interest to achieve investment goal).
AppB-1999
Education.
10 years x 4 quarters = 40 interest periods
8% annual / 4 quarters per year = 2% per quarter
Total accumulation = 2.2080 x $7,200 = $15,897.60
Future value of investment = $163,170 x 1.8385 = $299,988
In Table B.3, where n = 8 and p = $57,466/$10,000 = 5.7466, the i = 8%

(investor must earn 8% interest to achieve investment goal).
In Table B.3, where i = 10% and p = $82,014/$10,000 = 8.2014, the n = 18

(investor expects 18 annual payments to be received).
Interest rate per period = 12% annual / 12 months per year = 1% per month
Using Table B.3, where n = 40 and i = 1%, the p = 32.8347. This means:
Loan balance............$16,417.35 (present value of loan = 32.8347 x $500)
Down payment.......... 6,500.00 (cash)
Total cost..................$22,917.35
AppB-1999
Education.

1.
Future Number of Interest Table B.1 Amount
First Annuity Payment Periods Rate Value Borrowed
First payment........ $5,000 1 6% 0.9434 $ 4,717
Second payment... 5,000 2 6 0.8900 4,450
Third payment....... 5,000 3 6 0.8396 4,198
Fourth payment..... 5,000 4 6 0.7921 3,961
Fifth payment........ 5,000 5 6 0.7473 3,737
Sixth payment....... 5,000 6 6 0.7050 3,525
Total borrowed...... $24,588
Future Number of Interest Table B.1 Amount

Second Annuity Payment Periods Rate Value Borrowed
First payment........ $7,500 1 6% 0.9434 $ 7,076
Second payment... 7,500 2 6 0.8900 6,675
Third payment....... 7,500 3 6 0.8396 6,297
Fourth payment..... 7,500 4 6 0.7921 5,941
Total borrowed...... $25,989
2.
First Annuity
Payment size....................................... $ 5,000
Number of payments.......................... 6
Interest rate......................................... 6%
Value from Table B.3.......................... 4.9173
Present value of the annuity............. $24,587
(difference from part (1) due to rounding)
Second Annuity
Payment size....................................... $ 7,500
Interest rate......................................... 6%
(difference from part (1) due to rounding)
AppB-1999
Education.
1. Present value of the annuity

Payment size....................................... $13,000
Interest rate......................................... 4% (semiannual)

Payment size....................................... $13,000

Payment size....................................... $13,000
Semiannual interest payment = $500,000 x 10% x 1/2 = $25,000
Using Table B.1, where n = 30 and i = 4%, the p = 0.3083 ( Principal payment)
Using Table B.3, where n = 30 and i = 4%, the p = 17.2920 ( Interest payments)
0.3083 x $500,000 = $154,150 present value of maturity amount

17.2920 x $ 25,000 = 432,300 present value of interest payments
$586,450 cash proceeds
1. $90,000 x 0.6651 (using Table B.1, i = 6%, n = 7) = $59,859.
2. $20,000 x 2.4869 (using Table B.3, i = 10%, n = 3) = $49,738.
AppB-1999
Education.
In Table B.4, where n = 40 and f = $154,762/$1,000 = 154.762, the i = 6%

(investor must earn a 6% rate of interest).
In Table B.4, where i = 8% and f = $303,243/$10,000 = 30.3243, the n = 16

(investor must make 16 annual payments to achieve investment goal).
12% annual / 12 months per year = 1% per month
2.5 years x 12 months per year = 30 total months
Total accumulation = 34.7849 x $50 = $1,739.25
10 years x 4 quarters per year = 40 total quarters
12% annual / 4 quarters per year = 3% per quarter

3.2620 x $100,000 = $ 326,200 future value of initial investment

75.4013 x $50,000 = 3,770,065 future value of periodic investments
$4,096,265 future value of fund
AppB-1999
Education.
a. p = present value of $60,000 at 9% for 4 years

p = $60,000 x 0.7084
p = $42,504
b. p = present value of $15,000 at 8% for 2 years

p = $15,000 x 0.8573
p = $12,859.50
c. There are at least two ways to solve this problem. (1) We can take the
$463 today, compute its future value, and then compare it to the future
value amount of $1,000. (2) We can discount the $1,000 back to the
present and compare it to the $463 today.
The same answer results: choose $463 today
f = future value of $463 at 9% for 10 years

f = $463 / 0.4224
f = $1096.12 (which implies we’d prefer the $463 today)
p = present value of $1,000 at 9% for 10 years

p = $1,000 x 0.4224
p = $422.40 (which is less than $463 today)
d. f = future value of $90 at 5% for 8 years

Formula: $90 = f x 0.6768; then solve for f
f = $90 / 0.6768
f = $132.98
e. f = future value of $158,500 at 10% for 8 years

Formula: $158,500 = f x 0.4665; then solve for f
f = $339,764.20
AppB-1999
Education.
Exercise B-18 (concluded)
f. There are two aspects to this problem: a present value of a lump sum
part and a present value of an annuity part.
Part 1: p = present value of $10,000 at 6% for 10 years

p = $10,000 x 0.5584
p = $5,584
Part 2: p = present value of $400 annuity at 6% for 10 years

p = $400 x 7.3601
p = $2,944
The answer is the sum of the present values from parts 1 and 2:
$8,528 = $5,584 + $2,944 (we are willing to pay $8,528 for this investment)
g. p = present value of $500,000 at 6% for 20 years

p = $500,000 x 11.4699
p = $5,734,950 (present value of real amount won)
Instructor note: It can be useful to extend this problem and assume a 30% tax rate. In this
case the annuity after-tax declines to $350,000. Accordingly, the present value of the after-
tax amount is $4,014,465. Again, nothing near the $10 million winnings advertised.
AppB-1999
Education.
a. (1) Present Value of a single amount.

(2) Multiply $10,000 by p from Table B.1.
(3) Use Table B.1, periods = 8 and interest rate = 4%.
OR
(1) Future Value of a single amount.
(2) Divide $10,000 by f from Table B.2.
b. (1) Future Value of an Annuity.

(2) Divide $10,000 by f from Table B.4.
OR
(1) Present Value of an Annuity.
(2) Multiply $10,000 by p from Table B.1 and then divide by p from
Table B.3.
(3) Use Tables B.1 and B.3, periods = 8 and interest rate = 4%.
c. (1) Future Value of an Annuity.

(2) Multiply $4,000 by f from Table B.4.
(3) Use Table B.4, periods = 40 and interest = 8%.
d. (1) Present Value of an Annuity.

(2) Multiply $30,000 by p from Table B.3.
(3) Use Table B.3, periods = 20 and interest = 10%.
[Note: Students must recognize the present value of $225,000
received today is $225,000.]
AppB-1999
Education.

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Appendix B - Time Value of Money

Quick Study B-2 (10 minutes)

In Table B.1, where n = 15 and p = $2,745/$10,000 = 0.2745, the i = 9%.

Quick Study B-3 (10 minutes)

In Table B.1, where i = 6% and p = $6,651/$10,000 = 0.6651, the n = 7.

Quick Study B-4 (10 minutes)

In Table B.1, where n = 5 and i = 9%, the p = 0.6499.

Amount willing to pay today: 0.6499 x $140,000 = $90,986

Quick Study B-5 (10 minutes)

In Table B.2, where n = 10 and i = 12%, the f = 3.1058.

Cash proceeds at liquidation: 3.1058 x $630,000 = $1,956,654

Quick Study B-6 (10 minutes)

In Table B.3, where n = 6 and i = 7%, the p = 4.7665.

Amount willing to pay for the project: 4.7665 x $150,000 = $714,975

Quick Study B-7 (10 minutes)

In Table B.4, where n = 30 and i = 10%, the f = 164.494.

Ending value of the investment program: 164.494 x $1,500 = $246,741

In Table B.1, where n = 6 and i = 10%, the p = 0.5645.

Present value of investment = $606,773 x .5645 = $342,523

Exercise B-2 (15 minutes)

Amount borrowed = present value of $20,000 at 10% for 3 years

Exercise B-3 (10 minutes)

In Table B.2, where i = 12% and f = $96,463/$10,000 = 9.6463, the n = 20

Exercise B-4 (10 minutes)

In Table B.2, where n = 25 and f = $108,347/$10,000 = 10.8347, the i = 10%

Exercise B-5 (15 minutes)

10 years x 4 quarters = 40 interest periods

8% annual / 4 quarters per year = 2% per quarter

In Table B.2, where n = 40 and i = 2%, the f = 2.2080.

Total accumulation = 2.2080 x $7,200 = $15,897.60

Exercise B-6 (15 minutes)

In Table B.2, where n = 9 and i = 7%, the f = 1.8385.

Future value of investment = $163,170 x 1.8385 = $299,988

Exercise B-7 (10 minutes)

In Table B.3, where n = 8 and p = $57,466/$10,000 = 5.7466, the i = 8%

Exercise B-8 (10 minutes)

In Table B.3, where i = 10% and p = $82,014/$10,000 = 8.2014, the n = 18

Exercise B-9 (10 minutes)

Exercise B-10 (25 minutes)

Future Number of Interest Table B.1 Amount

Exercise B-11 (30 minutes)

1. Present value of the annuity

2. Present value of the annuity

3. Present value of the annuity

Present value of the annuity............. $43,057

Exercise B-12 (15 minutes)

Semiannual interest payment = $500,000 x 10% x 1/2 = $25,000

0.3083 x $500,000 = $154,150 present value of maturity amount

Exercise B-13 (15 minutes)

1. $90,000 x 0.6651 (using Table B.1, i = 6%, n = 7) = $59,859.

2. $20,000 x 2.4869 (using Table B.3, i = 10%, n = 3) = $49,738.

Exercise B-14 (10 minutes)

In Table B.4, where n = 40 and f = $154,762/$1,000 = 154.762, the i = 6%

Exercise B-15 (10 minutes)

In Table B.4, where i = 8% and f = $303,243/$10,000 = 30.3243, the n = 16

Exercise B-16 (15 minutes)

12% annual / 12 months per year = 1% per month

2.5 years x 12 months per year = 30 total months

In Table B.4, where n = 30 and i = 1%, the f = 34.7849.

Total accumulation = 34.7849 x $50 = $1,739.25

Exercise B-17 (15 minutes)

10 years x 4 quarters per year = 40 total quarters

12% annual / 4 quarters per year = 3% per quarter