CHAPTER 5 – THE TIME VALUE OF MONEY

1. Calculate the future value of $20,000 ten years from now if the annual interest rate is
a. 0 percent c. 10 percent
b. 5 percent d. 20 percent

2. How much will you have in 10 years if you deposit $5,000 today and earn 6 percent annual interest?

3. Calculate the present value of $20,000 to be received twenty years from now at an annual discount
rate
a. 0 percent c. 10 percent
b. 5 percent d. 20 percent

4. Norton is going to receive a graduation present of $9,000 from his grandparents in four years. If the
annual discount rate is 6 percent, what is this gift worth today?

5. You invested $50,000, and 10 years later the value of your investment has grown to $118,368. What
is your compounded annual rate of return over this period?

6. What is the rate of return on an investment that grows from $50,000 to $118,368 in 10 years?

7. How much money would Ruby Carter need to deposit in her savings account at Great Western
Bank today in order to have $16,850.58 in her account after five years? Assume she makes no other
deposits or withdrawals and the bank guarantees a 6 percent annual interest rate, compounded annually.

8. The Apple stock you purchased twelve years ago for $55 a share is now worth $490.39. What is the
compounded annual rate of return you have earned on this investment?

9. Amy Jolly deposited $1,000 in a savings account. The annual interest rate is 10 percent, compounded
semiannually. How many years will it take for her money to grow to $4,321.94?

10. Lisa invested $1,000 in a certificate of deposit (CD) that pays 4% annual interest, compounded
continuously,
for fifteen years. How much money will she have when this CD matures?

11. Matt and Christina Drayton deposited $1,000 into a savings account the day their daughter, Joey,
was born. Their intention was to use this money to help pay for Joey’s wedding expenses when and if
she
decided to get married. The account pays 5 percent annual interest with continuous compounding. Upon
her return from a graduation trip to Hawaii, Joey surprises her parents with the sudden announcement of
her planned marriage to John Prentice. The couple set the wedding date to coincide with Joey’s twenty
third birthday. How much money will be in Joey’s account on her wedding day?

12. You deposit $1,000 in an account that pays 8 percent annual interest, compounded annually. How
long will it take to triple your money?

13. Heidi’s grandmother died and provided in her will that Heidi will receive $100,000 from a trust
when Heidi turns 21 years of age, 10 years from now. If the appropriate discount rate is 8%, what is the
present value of this $100,000 to Heidi?

14. Assume the following set of cash flows:

At an annual discount rate of 10 percent, the total present value of all the cash flows above, including
the missing cash flow, is $471.01. Given these conditions, what is the value of the missing cash flow?

15. Jack Torrance comes to you for financial advice. He hired the Redrum Weed-N-Whack Lawn
Service to trim the hedges in his garden. Because of the large size of the project (the shrubs were really
out of control), Redrum has given Jack a choice of four different payment options. Which of the
following four options would you recommend that Jack choose? Why?
• Option 1. Pay $5,650 cash immediately.
• Option 2. Pay $6,750 cash in one lump sum two years from now.
• Option 3. Pay $800 at the end of each quarter for two years.
• Option 4. Pay $1,000 immediately plus $5,250 in one lump sum two years from now.
Jack tells you he can earn 6 percent annual interest, compounded quarterly, on his money. You have no
reason to question his assumption.

16. Upon reading your most recent credit card statement, you are shocked to learn that the balance owed
on your purchases is $4,000. Resolving to get out of debt once and for all, you decide not to charge any
more purchases and to make regular monthly payments until the balance is zero. Assuming that the
bank’s credit card annual interest rate is 19.5 percent and the most you can afford to pay each month is
$250, how long will it take you to pay off your debt?

17. If you invest $2,000 per year for the next ten years at 6 percent annual interest rate, beginning one
year from today compounded annually, how much are you going to have at the end of the tenth year?

18. If you invest $4,000 per year into your pension fund, earning 7 percent annually, how much will you
have at the end of twenty years? You make your first payment of $4,000 today.

19. If your required annual rate of return is 6 percent, how much will an investment that pays $80 a year
at the beginning of each of the next 20 years be worth to you today?
20. You are valuing a preferred stock that makes a dividend payment of $65 per year, and the current
discount rate is 8.5 percent. What is the value of this share of preferred stock?