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Exercises Chapter 8 Time Value of Money

This document contains 13 multi-part exercises involving calculations using the time value of money concept. The exercises require calculating future and present values of investments, determining investment amounts needed to reach future values, and comparing investment options using present value analysis. Calculations are required for scenarios such as accumulating savings for future goals like education or vacations, determining investment rates of return, and evaluating equipment or software purchase options. A variety of interest rates from 5% to 12% are provided within the context of investments ranging from 1 to 18 years. Present value tables with interest rate factors are also provided.

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Thet Thet Mar
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34 views

Exercises Chapter 8 Time Value of Money

This document contains 13 multi-part exercises involving calculations using the time value of money concept. The exercises require calculating future and present values of investments, determining investment amounts needed to reach future values, and comparing investment options using present value analysis. Calculations are required for scenarios such as accumulating savings for future goals like education or vacations, determining investment rates of return, and evaluating equipment or software purchase options. A variety of interest rates from 5% to 12% are provided within the context of investments ranging from 1 to 18 years. Present value tables with interest rate factors are also provided.

Uploaded by

Thet Thet Mar
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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230

Exercises
Time Value of Money
1. Compute the amount that a $20,000 investment today would accumulate at 10% (compound
interest) by the end of 6 years.

2. Mary wants to set aside funds to take an around the world cruise in four years. Mary expects
that she will need $15,000 for her dream vacation. If she is able to earn 9% per annum on an
investment, how much will she have to set aside today so that she will have sufficient funds
available?

3. Maria has $50,000 to invest. She requires $125,000 for a down payment for a house. If she is
able to invest at 8%, how many years will it be before she will accumulate the desired balance?

4. Lucy and Fred want to begin saving for their baby's college education. They estimate that they
will need $350,000 in eighteen years. If they are able to earn 5% per annum, how much must be
deposited at the end of each of the next eighteen years to fund the education?

5. Pearson Corporation makes an investment today (January 1, 2018). They will receive $10,000
every December 31st for the next six years (2018 – 2023). If Pearson wants to earn 10% on the
investment, what is the most they should invest on January 1, 2018?

6. What interest rate (the nearest percent) must Max earn on a $75,000 investment today so that he
will have $189,000 after 12 years?

7. Compute the present value of an investment in equipment if it is expected to provide annual


savings of $40,000 for 10 years and to have a resale value of $100,000 at the end of that period.
Assume an interest rate of 8% and that savings are realized at year end.

8. UTCC Company has machinery that cost $80,000. It is to be leased for 15 years with rent
received at the end of each year. UTCC wants a return of 12%. Compute the amount of the annual
rent.

9. Compute the market price of a $200,000, ten-year, 10% (pays interest semiannually) bond issue
sold to yield an effective rate of 12%.
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10. On January 1, 2018, UTCC Inc. issued five-year bonds with a face value of $500,000 and a
stated interest rate of 10% payable semiannually on July 1 and January 1. The bonds were sold to
yield 12%. Present value table factors are:

Present value of 1 for 5 periods at 10% .62092


Present value of 1 for 5 periods at 12% .56743
Present value of 1 for 10 periods at 5% .61391
Present value of 1 for 10 periods at 6% .55839
Present value of an ordinary annuity of 1 for 5 periods at 10% 3.79079
Present value of an ordinary annuity of 1 for 5 periods at 12% 3.60478
Present value of an ordinary annuity of 1 for 10 periods at 5% 7.72173
Present value of an ordinary annuity of 1 for 10 periods at 6% 7.36009

Calculate the issue price of the bonds.


11. Margie established a savings account for her son's college education by making annual
deposits of $5,000 at the end of each of six years to a savings account paying 6%. At the end of
the sixth year, the account balance was transferred to a bank paying 8%, and annual deposits of
$6,000 were made at the end of each year from the seventh through the tenth years. What was the
account balance at the end of the tenth year?

12. On October 1, 2018, Mike Company purchased equipment from Dexter Inc. in exchange for
a noninterest-bearing note payable in five equal annual payments of $100,000, beginning
October 1, 2014. Similar borrowings have carried an 11% interest rate. Compute the present
value of the equipment.

13. Delta is considering two options for comparable computer software. Option A will cost
$50,000 plus annual license renewals of $2,000 for three years, which includes technical support.
Option B will cost $40,000 with technical support being an add-on charge. The estimated cost of
technical support is $8,000 the first year, $6,000 the second year, and $4,000 the third year.
Assume the software is purchased and paid for at the end of year one, and the technical support
is paid for at the end of each year. Interest is at 7%. Ignore income taxes. Determine which
option should be chosen based on present value considerations.

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