1: Given the following set of cash flows over the lifetime of a project, what is

the present value (to the nearest $) at a discount rate of 9%?

Year Cash flow ($)

1 5,000 PV1=5000/(1+9%)=4587.2

2 4,000 PV2=4000/(1+9%)^2=3366.7

3 -3,000 PV3= -3000/(1+9%)^3= -2316.5

4 1,500 PV4= 1500/(1+9%)^4= 1062.6

SUM= 4587.2 + 3366.7 - 2316.5 + 1062.6 = 6700

2. Suppose you face the prospect of receiving $200 per year for the next
years plus an extra $500 payment at the end of 6 years.
Determine how much thisprospect is worth today if the required rate of
return is 11%.

Year 1 2 3 4 5 6

CF 200 200 200 200 200 200+500

3. Suppose we have three future cash flows, $2,000 a year from now, $1,400
three years from now and $1,700 five years from now. The annual interest rate
is 12%.What is the present value of these multiple uneven future cash flows?

4. At an interest rate of 9%, which of the following cash flows should you
prefer?

Project Year 1 Year 2 Year 3

A $500 $300 $100

B $100 $300 $500

C $300 $300 $300

5. Mr. Hopper is expected to retire in 25 years and he wishes accumulate

$750,000 inhis retirement fund by that time. If the interest rate is 10% per
year, how much shouldMr. Hopper put into the retirement fund each year in
order to achieve this goal?[Assume that the payments are made at the end of
each year

6. Mr. Hopper is expected to retire in 25 years and he wishes accumulate

$750,000 inhis retirement fund by that time. If the interest rate is 10% per
year, how much shouldMr. Hopper put into the retirement fund each year in
order to achieve this goal?[Assume that the payments are made at the end of
each year

7. What is the future value of the following cash flow in year five with the
discountrate of 10%?

Year 0 1 2 3 4 5

CF 135,000 110,000 80,000 50,000 25,000

8. Kelly Martin has $10,000 that she can deposit into a savings account for
five years. Bank A pays compounds interest annually, Bank B twice a year,
and Bank C quarterly. Each bank has a stated interest rate of 4 percent/year.
What amount would Kelly have at the end of the fifth year if she left all the
interest paid on the deposit in each bank?

9. Your aunt is planning to invest in a bank deposit that will pay 7.5 percent
interest semiannually. If she has $5,000 to invest, how much will she have at
the end of four years

10. You are in desperate need of cash and turn to your uncle who has offered
to lend you some money. You decide to borrow $1,300 and agree to pay back
$1,500 in two years. Alternatively, you could borrow from your bank that is
charging 6.5 percent interest annually. Should you go with your uncle or the
bank?

11. Samuelson Engines wants to save $750,000 to buy some new equipment
six years from now. The plan is to set aside an equal amount of money on the
first day of each quarter starting today. The firm can earn 4.75 percent on its
savings. How much does the firm have to save each quarter to achieve its
goal?

12. Single payment, future value? You would like to buy a house that is
currently on the market at $85,000, but you cannot afford it right now.
However, you think that you would be able to buy it after 4 years. If the
expected inflation rate as applied to the price of this house is 6% per year,
what is its expected price after four years?

13. Single payment, future value? Jack has deposited $6,000 in a money
market account with a variable interest rate. The account compounds the
interest monthly. Jack expects the interest rate to remain at 8% annually for
the first 3 months, at 9% annually for the next 3 months, and then back to 8%
annually for the next 3 months. Find the total amount in this account after 9
months.

14. . Single payment, future value? You decide to put $12,000 in a money
market fund that pays interest at the annual rate of 8.4%, compounding it
monthly. You plan to take the money out after one year and pay the income
tax on the interest earned. You are in the 15% tax bracket. Find the total
amount available to you after taxes.

15. 4. Present value, interest rate? You expect to receive $10,000 as a bonus
after 5 years on the job. You have calculated the present value of this bonus
and the answer is $8000. What discount rate did you use in your calculation?

16. . Single payment, interest rate? You have borrowed $850 from your sister
and you have promised to pay her $1000 after 3 years. With annual
compounding, find the implied rate of interest for this loan.

17. Single payment, interest rate? You have borrowed $10,000 from a bank
with the understanding that you will pay it off with a lump sum of $12,000 after
2 years. Find the annual rate of interest on this loan.

18. Single payment, interest rate? Ampere Banking Corporation offers two
types of certificates of deposit, each requiring a deposit of $10,000. The first
one pays $11,271.60 after 24 months, and the second one pays $12,139.47
after 36 months. Find their monthly-compounded rate of return.

19. Single payment, time? A bank account pays 5.5% annual interest,
compounded monthly. How long will it take the money to double in this
account?

20. Multiple payments, future value? Suppose you deposit $350 at the
beginning of each month in an account that pays 6% annual interest,
compounded monthly. Find the total amount in this account at the end of 25
months.

21. [FV, SINGLE CASH FLOW] Cleo McDermott plans to buy a cruise tickets to the
Bahamas and can afford to set aside $1,740 toward the purchase today. If the
annual interest rate is 6.4%, how much can Cleo McDermott spend in three years on
the purchase? [$2096]

[FV, MULTIPLE YEARS] Compute the future value of $1,870 if the appropriate rate is
13.2% and you invest the money for four years? [$3071]

[PV] Jack Black plans to buy a surround sound stereo for $2,220 after two years. If
the annual interest rate is 6.7%, how much money should Jack Black set aside today
for the purchase? [$1950]

[PV, QUARTERLY COMPOUNDING] Bob Simpson plans to buy a piano for $1,509
after three years. If the annual interest rate is 13.6% compounded every quarter,
how much money should Bob Simpson set aside today for the purchase? [$1010]
PV=1509/(1+ 13.6%/4)^(4*3)=1010

[FV, MULTIPLE CASH FLOW] Cary Grant proposes to set aside $9,600
toward retirement every year for the next 11 years. If the annual interest rate
is 10.9%, how much will Cary Grant have in the retirement account in 11
years? [$186,774]

Nicole James proposes to set aside $800 toward retirement every month for the
next 20 years. If the annual interest rate is 9.1% compounded every month, how
much will Nicole James have in the retirement account in 20 years? [$541,147]
 Exercise For Time Value of Money

Now 1 2 3 4 5
Option A $60 $60 $60 $60 $60+$1000
Option B ???
Q1) Given that interest rate is 2%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$1188.54)
Q2) Given that interest rate is 15%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$698.31)

Now 1 2 3 4 5
Option A $127.63
Option B ???
Q3) Given that interest rate is 5%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$100)

Now 1 2 3 4 5
Option A ???
Option B $100
Q4) Given that interest rate is 5%, how much of the money should I give to you AT THE END OF YEAR_5 so that you are indifferent between
two options? (ANSWER:$127.63)

Now 1 2 3 4 5
Option A ? ? ? ? ?
Option B $100
Q5) Given that interest rate is 5%, how much of the fixed amount of money should I give to you AT THE END OF YEAR_5 so that you are
indifferent between two options? (ANSWER:$23.10)

Q6) Suppose you can buy a certificate for $78.35 which will pay you $100 after 5 years. What is the interest rate you will earn on your
investment? (ANSWER: 5%)

Q7) Suppose you know that a bond will provide a return of 5% per year, that it costs you $783.5 now, and that you will receive $1,000 at the
maturity. But you don’t know when the bond matures. (ANSWER : n=5)

Now 1 2 3
Option A $100 $100 $100
Option B ?
Q8) Given that interest rate is 5%, how much of the money should I give to you AT THE END OF YEAR 3 so that you are indifferent between
two options? (ANSWER:$315.25)

Now 1 2
Option A $100 $100 $100
Option B ?
Q9) Given that interest rate is 5%, how much of the money should I give to you AT THE END OF YEAR 2 so that you are indifferent between
two options? (ANSWER:$331.01)

Now 1 2
Option A $100 $100 $100
Option B ?
Q10) Given that interest rate is 5%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$285.94)

8
 Exercise For Time Value of Money (Continued)

Now 1 2 3 4 5
Option A 100 200 200 0 300
Option B ?
Q11) Given that interest rate is 5%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$684.47)

Now 1 2 3 4 5
Option A $100 100 200 200 0 300
Option B ? ?
Q12) Given that interest rate is 5%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$784.47)

Now 1 2 3 4 5
Option A 100 200 200 0 300
Option B ?
Q13) Given that interest rate is 5%, how much of the money should I give to you AT THE END OF YEAR 5 so that you are indifferent between
two options? (ANSWER:$873.58)
: You can’t get the answer of this question by using the built-in function in the financial calculator.
: You need to compute FV of each CF one by one.

Now 1 2 3 4 5
Option A 200 200 200
Option B ?
Q14) Given that interest rate is 5%, how much of the money should I give to you AT THE END OF YEAR 5 so that you are indifferent between
two options? (ANSWER:$695.13)

Now 1 2 3 4 5
Option A 200 200 200 200 Forever
Option B ?
Q15) Given that interest rate is 5%, how much of the money should I give to you NOW so that you are indifferent between two options?
(ANSWER:$4,000)

 Effective Annual Rate

 Continuous Compounding
 Semiannual (or Quarterly, or Monthly, or Dalily) Compounding and Payment

 Find the amount to which $500 will grow under each of the following conditions.
 12 percent compounded annually for 5 years
 12 percent compounded semiannually for 5 years
 12 percent compounded monthly for 5 years
 12 percent compounded daily for 5 years [Assume 1 year =360 days]
 12 percent compounded continuously for 5 years

 The First Bank pays 7% interest, compound annually, on time deposit. The Second Bank pays 6% interest, compounded
quarterly. Which bank gives you higher interest? How can you justify your choice of the bank?