Chapter – 09

Time Value of Money

1. You invest $3,000 for three years at 12 percent. FV = Future value
a. What is the value of your investment after one year?
PV = Present value
b. What is the value of your investment after two years?
n = Number of periods
i = Interest rate
Formula: FV = PV (1+i)n
a) FV = $3000 x 1.12 = 3,360/-

b) FV = $3,000 x (1+.12)²
= $3,000 x 1.2544
= $3,763.20
2. What is the present value of
FV = Future value
Formula: PV = FV 1
PV = Present value
(1+i)n
n = Number of periods
= $7,900 [1/(1+.11)10] i = Interest rate
= $2,782.28

3. a) What is the present value of $140,000 to be received after 30 years with a

14 percent discount rate?
b) Would the present value of the funds in part a be enough to buy a $2,900
concert ticket?
a) PV = FV [1/(1+i)n]
= $140,000 (1/(1+.14)30
= $2,747.78
b) No, the present value of $140,000 (i.e, $2,747.78) is not enough to buy a $2,900
concert ticket.
5. If you invest $9,000 today, how much will you have
a) In 2 years at 9 percent?
a) FV = PV (1+i)n
= $9,000 (1.09)2
= 10,692.9

6. Your aunt offers you a choice of $20,100 in 20 years or $870 today.

If money is discounted at 17 percent, which should you choose?
PV = FV [1/(1+i) n]
= $20,100 [1/(1.17) 20]
= $ 869.92
Both are same.

HW = 7- 9
10. How much would you have to invest today to receive
a) PV = FV [1/(1+i)n ]
= $15,000 [1/(1+.10)8 ]
= $ 7,005/-

11. If you invest $8,500 per period for the following number of periods, how much would you have?

a) FVA = A {(1+i) n - 1}
FVA = Future value Annuity
i
A = Annuity = $8,500
= $8,500 {(1+.10)12 -1}
n = Number of periods = 12 years
.10
i = Interest rate = 10%
= $8,500 x 21.384
= 181,764/-
12. You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5
years you take the proceeds and invest them for 12 years at 15 percent. How much will
you have after 17 years?

* First investment:
FV = PV (1+i)n
= $10,000 (1+.10)5
= $16,105/-

* Second investment:
FV = PV (1+i)n
= $16,105 (1.15)12
= $86,161.75
13. Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent
interest rate is applied, what is the current value of the future payments?

PVA = A [ 1-1/(1+i)n ] /i
= $7,600 [1 -1/(1 + 0.14) 19] / 0.14
= $7,600 X 6.5504
= $ 49,783/-

14. Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds
are discounted back at a rate of 14 percent, what is the present value of his future “pot of gold”?

PV = FV [1/(1+i)n ]
= $175,000 [ 1/(1+.14)50 ]
=$250
15. Sherwin Williams will receive $18,500 a year for the next 25 years as a result of
a picture he has painted. If a discount rate of 12 percent is applied, should he be willing
to sell out his future rights now for $165,000?

PVA = A [ 1-1/(1+i)n ] /i
= $18,500 [1 -1/(1 + 0.12) 25] / 0.12
= $18,500 X 7.843
= $ 145,096/-

Yes, as the present value of the annuity is worth less than $165,000/-

HW – 16 & 17
18. Rita Gonzales won the $41 million lottery. She is to receive $1.5 million a year for the next
19 years plus an additional lump sum payment of $12.5 million after 19 years. The discount
rate is 14 percent. What is the current value of her winnings?

PVA = A [ 1-1/(1+i)n ] /i
= $1,500,000 [1 -1/(1 + 0.14) 19 ] / 0.14
= $1,500,000 x 6.550
= $ 9,825,000/-

PV = FV [1/(1+i)n ]
= $1,250,000 [ 1/(1+.14)19 ]
= $1,250,000 x 0.083
= $ 103,750/-
Current value of her winnings is = $9,825,000 + $103,750
= $9,928,750/-
19. Al Rosen invests $25,000 in a mint condition 1952 Mickey Mantle Topps baseball card. He expects
the card to increase in value 12 percent per year for the next 10 years. How much will his card be worth
after 10 years?
FV = PV (1+i)n
= $25,000 (1+.12) 10
= $25,000 x 3.106
= $77.650/-

20. Christy Reed made a $2,000 deposit in her savings account on her 21st birthday, and she has made
another $2,000 deposit on every birthday since then. Her account earns 7 percent compounded annually.
How much will she have in the account after she makes the deposit on her 32nd birthday?

FVA = A {(1+i) n - 1}
i
= $2,000 {(1+.07)12 -1}
.07
= $2,000 x 17.888 = $35,776/-
21. At a growth rate (interest rate) of 10% annually, how long will it take for a sum to double? To
triple?

We Know, FV =PV (1+i)n

Lets assume PV=X, So, FV=2X

So Now we can write 2X =X (1+i)n

2 = (1+0.09)n
(1.09)n= 2
Now if we take log in both sides,
nLog 1.09 =Log2
n(0.037426)= 0.30102
n = 0.30102/ 0.037426
n = 8 years.
So, it will take 8 years for a sum to be double.

To triple: Just assume PV=X, So, FV=3X

22. If you owe $35,000 payable at the end of eight years, what amount should your creditor accept in
payment immediately if she could earn 13% on her money?

PV= FV/ (1+i)n

= $35,000/(1+ 0.13)8

= $13,165.59

The creditor will accept $13,165.59 immediately

23. Jcak Hammer invests in a stock that will pay dividends of $2.00 at the end of the first year, $2.20 at
the end of the second year, and $2.40 at the end of the third year. Also, he believes that at the end of the
third year he will be able to sell the stock for $33. What is the present value of all three benefits if a
discount rate of 11% is applied?

At the end of the first year he gets $2 as dividend

So, Present value of $2, PV= 2/(1+0.11)1= $1.80

At the end of the second year he gets $2.20 as dividend

So, Present value of $2.20, PV= 2.20/(1+0.11)2= $1.78

At the end of the third year he gets $2.40 as dividend and also gets $33 by selling the stock, So, he gets total
$2.40+ $33= $ 35.40 at the end of the third year.

So, PV= $35.40/(1+0.11)3= $25.88

Now Total present Value of the Stock is $25.88+ $1.78+ $1.80= $29.46
25. Juan Garza invested $20,000 10 years ago at 12%, compounded quarterly, how much has he
accumulated?

FV =PV (1+i)n

Given, PV= $20,000

i = 12% & n= 10
If quarterly compounded:
i= 12%/4= 3%= 0.03
& n=10*4= 40

FV= $20,000(1+0.03)40= $65,240.755

26. In a savings account at the end of 10 years, given an initial deposit of $5,500 and a 12% annual
interest rate when interest is compounded a) annually, b) semiannually, and c) quarterly.

FV =PV (1+i)n
Given, PV= $5,500
i = 12% & n= 10

a) If annually compounded:

FV= $5,500(1+0.12)10= $17,082.165

b) If semiannually compounded:
i= 12%/2= 6%= 0.06
& n=10*2= 20

So, FV= $5,500(1+0.06)20 = $17,639.24

29. Your grandfather has offered you a choice of one of the three following alternatives: $7,500 now; $2,200
a year for nine years; or $31,000 at the end of the nine years. Which alternative should you choose?
Assuming you could earn 10% annually. If you could earn11% annually would you still choose the same
alternative?
Alternative 1: $7,500 now
Alternative 2: $2,200 a year for nine years.
Present value of the 2nd alternative:
A=$2,200, n=9 years, i=10%

PVA= A [{1-1/(1+i)n}/i]
=$2,200[{1-1/(1+0.10)9}/0.10
=$12,669.85
Alternative 3: $31,000 at the end of the nine years
PV= FV/ (1+i)n
PV=31,000/(1+0.10)9
=$13,147.02
I will choose the 3rd alternative.
30. You need $28,074 at the end of 10 years, and your only investment outlet is an 8% long-term certificate of deposit
(compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.
a) What single payment could be made at the beginning of the first year to achieve this objective?
b) What amount could you pay at the end of each year annually for 10 years to achieve this same objective?

a) PV= FV/ (1+i)n

PV =$28,974/ (1+0.08)10
= $13,420

b) FVA = A[(1+i)n – 1]/i

A = FVA [ i/ {(1+i)n -1}]
= $28,974[0.08/{(1+0.08)10- 1}]
= $2000
31. Beverly Hills started a paper route on January 1. Every three months, she deposits $550 in her bank
account, which earns 8% annually but is compounded quarterly. Four years later, she used the entire
balance in her bank account to invest in an investment at 7% annually. How much will she have after
three more years?

FVA = A[(1+i)n – 1]/i

=$550[(1+0.02)16- 1]/0.02
=$10251.60

FV =PV (1+i)n

=$ 10251.60(1+0.07)3

= $ 12558.65
35. Betty Bronson has just retired after 25 years with the electric company. Her total pension funds
have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund
manager assumes he can earn a 9 % return on her assets. What will be her yearly annuity for the next
15 years?

PVA= A [1-1/(1+i)n]/i
A = PVA [i/{1-1/(1+i)n}]
= $1,80,000[0.09/{1-1/(1+0.09)15}]
= $22,344.80
36. Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is expected to
increase in value by 12% per year for the next five years. He will take the proceeds and provide
himself with a 10-year annuity. Assuming a 12% interest rate, how much will this annuity be?

FV =PV (1+i)n
=$50,000(1+0.12)5
=$88,117

PVA= A [1-1/(1+i)n]/i
A = PVA[i/{1-1/(1+i)n}]
= $88,117[0.12/{1-1/(1+0.12)10}]
= $15,782
37. You wish to retire in 14 years, at which time you want to have accumulated enough money to
receive an annual annuity of $17,000 for 19 years after retirement. During the period before
retirement you can earn 8% annually, while after retirement you can earn 10% on your money.
What annual contributions to the retirement fund will allow you to receive the $17,000 annuity?

PVA= A [1-1/(1+i)n]/i

=$17,000[1-1/(1+0.10)19]/0.10
=$142,203.64
FVA = A[(1+i)n – 1]/i

A = FVA [ i/ {(1+i)n -1}]

= $142,203.64[0.08/{(1+0.08)14- 1}]
=$5873.14
39. Bridget Jones has a contract in which she will receive the following payments for the next five
years: $1,000, $2,000, $3,000, $4,000 & $5,000. She will then receive an annuity of $8,500 per year
from the end of the 6th through the end of the 15th year. The appropriate discount rate is 14%. If she is
offered $30,000 to cancel the contract, should she do it?
PV= FV/ (1+i)n

PV1=1000/(1+.14)1 = 877.19

PV2=2000/(1+.14)2 =1538.93

PV3=3000/(1+.14)3 = 2024.91

PV4=4000/(1+.14)4 = 2368.32

PV5=5000/(1+.14)5 = 2596.84

Total = 9,406
PVA= A [1-1/(1+i)n]/i
= 8500[1-1/(1+.14)10]/.14
= 44,336

PV= FV/ (1+i)n

= 44,336/(1+.14)5 =23,026

Total PV=23,026+ 9406 = 32,432.729

She should not cancel the contract because the value of the contract
is more than the offered value $30,000.
40. Mark Ventura has just purchased an annuity to begin payment two years from today. The
annuity is for $8000 per year and is designed to last 10 years. If the interest rate for this problem
calculation is 13%, what is the most he should have paid for the annuity?

Given, Annuity A= $8000

Interest rate i=13%,
n=10
We Know, PVA= A [1-1/(1+i)n]/i

= $8,000[1 – 1/(1+ 0.13)10]/0.13

= $43,410

PV = $43,410/(1+0.13)1= $38,415.929