Additional Exercise on Time Value of Money
1. Find the values for the following:
a. An initial $500 compounded for 1 year at 6 percent.
b. An initial $500 compounded for 2 years at 6% percent.
c. The present value of $500 due in 1 year at a discount rate of 6 percent.
d. The present value of $500 due in 2 years at a discount rate of 6 percent.
2. What is the monthly payment on a 5 year car loan for $14,000 at an annual interest rate of
12%?
3. Which grows to a larger future value, $1000 invested for 2 years at:
a. 10 percent each year
b. 5 percent the first year and 15 percent the second year or
c. 15 percent the first year and 5 percent the second year?
Explain your results.
4. Which grows to a larger future value:
a. $4000 invested for 10 years at 5% or
b. $2000 invested for 10 years at 10%.
5. Which is worth more at 10 percent, compounded annually:
$1000 in hand today or $2,000 due in 5 years?
6. A paper company invests $4m to clear a tract of land and plant some young pine trees. The
trees will mature in 10 years, at which time the forest will have a market value of $8m. What is
the expected rate of return for the paper company's investment?
7. A 1987 advertisement in the New Yorker solicited offers on a 1967 Mercury Cougar XR7
(Motor Trend's 1967 car of the year) that had been stored undriven in a climate controlled
environment for 20 years. If the original owner paid $4000 for this car in 1967, what price would
he have to receive in 1987 to obtain a 10 percent annual return on his investment?
8. Vincent Van Gogh sold only one painting during his lifetime, for about $30. A sunflower still
life he painted in 1888 sold for $39.85 million in 1988,, more than three times the highest price
paid previously for any work of art. If this painting had been purchased for $30 in 1888 and sold
in 1988 for $39.85 million, what would have been the annual rate of return?
9. In 1940, your grandmother put $1000 into a special trust to be paid to a future grandchild
(you) 60 years later, in the year 2000. How much will this trust be worth in the year 2000 if it has
been earning 8%? How much if it earns 12%.
10. A lottery jackpot of one million is paid out $25,000 a year for 40 years. At a 10 percent
required return, what is the present value of this payoff? Assume that the first payment is paid
immediately.
11. At an interest rate of 10%, what is present value of $1m to be received in:
a. 10 years
b. 50 years
c. 100 years
d. 150 years
12. You have been hired as a financial advisor to Michael Jordan. He has received two offers for
playing professional basketball and wants to select the best offer, based on considerations of
money only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a $11m offer of $1m
a year for four years and $7m in year 5. What is your advice? (Hint: compare the present value of
each contract by assuming a range of interest rate, say 8% - 14%)
13. Assume it is now January 1, 2000, and someone offers the following deal: starting from year
2000, you will be paid each year the amount of dollars equal to the year, i.e., $2000, $2001,
$2002, .... until year 3000 inclusive. If payments occur at the year end and the interest rate
remains at 10%, what is the PV of such a deal? What is the PV if the payments covers only the
years from 2000 to 2050 inclusive? What can you conclude for the comparison?
