TOPIC 3: TIME VALUE OF MONEY FIN

Problems for TOPIC 3

1. What is the present value of:

2. If you invest $9,000 today, how much will you have:

3. Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is
discounted at 12 percent, which should you choose?

4. Your aunt offers you a choice of $60,000 in 40 years or $850 today. If money is
discounted at 11 percent, which should you choose?

5. You are going to receive $100,000 in 50 years. What is the difference in present value
between using a discount rate of 14 percent versus four percent?
6. How much would you have to invest today to receive:
a. $15,000 in 8 years at 10 percent?
b. $20,000 in 12 years at 13 percent?
c. $6,000 each year for 10 years at 9 percent?
d. $50,000 each year for 50 years at 7 percent?

7. If you invest $2,000 a year in a retirement account, how much will you have:
a. In 5 years at 6 percent?
b. In 20 years at 10 percent?
c. In 40 years at 12 percent?

8. 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?
9. Jean Splicing will receive $8,500 a year for the next 15 years from her trust. If a 7 percent
interest rate is applied, what is the current value of the future payments?

10. 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”?
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11. Polly Graham will receive $12,000 a year for the next 15 years as a result of her patent.
If a 9 percent rate is applied, should she be willing to sell out her future rights now
for $100,000?
12. Carrie Tune will receive $19,500 a year for the next 20 years as a payment for a new
song she has written. If a 10 percent rate is applied, should she be willing to sell out her
future rights now for $160,000?
13. The Clearinghouse Sweepstakes has just informed you that you have won $1 million. The
amount is to be paid out at the rate of $20,000 a year for the next 50 years. With a
discount rate of 10 percent, what is the present value of your winnings.
14. Joan Lucky won the $80 million lottery. She is to receive $1 million a year for the next
50 years plus an additional lump sum payment of $30 million after 50 years. The discount
rate is 12 percent. What is the current value of her winnings?
15. 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?
16. If you owe $40,000 payable at the end of seven years, what amount should your creditor
accept in payment immediately if she could earn 12 percent on her money?
17. Jack 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 future benefits if a discount rate of 11 percent is applied? (Round
all values to two places to the right of the decimal point.)
18. Les Moore retired as president of Goodman Snack Foods Company but is currently on a
consulting contract for $35,000 per year for the next 10 years.
a. If Mr. Moore’s opportunity cost (potential return) is 10 percent, what is the present
value of his consulting contract?
b. Assuming Mr. Moore will not retire for two more years and will not start to receive
his 10 payments until the end of the third year, what would be the value of his
deferred annuity?
19. You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent
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?
20. Sue Sussman started a paper route on December 31, 2002. Every three months, she
deposits $500 in her bank account, which earns 4 percent annually but is compounded
quarterly. On December 31, 2005 she used the entire balance in her bank account to
invest in a contract that pays 9 percent annually. How much will she have on December
31, 2008?
21. 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 percent return on her assets. What
will be her yearly annuity for the next 15 years?
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22. Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is
expected to increase in value by 12 percent per year for the next five years. He will take
the proceeds and provide himself with a 10-year annuity. Assuming a 12 percent interest
rate, how much will this annuity be?
23. You wish to retire after 18 years, at which time you want to have accumulated enough
money to receive an annuity of $14,000 a year for 20 years of retirement. During the
period before retirement you can earn 11 percent annually, while after retirement you can
earn 8 percent on your money. What annual contributions to the retirement fund will
allow you to receive the $14,000 annually?
24. Del Monty will receive the following payments at the end of the next three years: $2,000,
$3,500, and $4,500. Then from the end of the fourth through the end of the tenth year, he
will receive an annuity of $5,000 per year. At a discount rate of 9 percent, what is the
present value of all three future benefits?
25. 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, and $5,000. She will then receive an annuity
of $8,500 a year from the end of the 6th through the end of the 15th year. The appropriate
discount rate is 14 percent. If she is offered $30,000 to cancel the contract, should she do
it?
26. Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10
percent interest. That is, in this particular case, the amount owed will go up by 10 percent
per year for five years. The lender then will require that Cal pay off the loan over the next
12 years at 11 percent interest. What will his annual payment be?
27. If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year
life of the loan, what equal annual payments must be made to discharge the loan, plus pay
the bank its required rate of interest (round to the nearest dollar)? How much of his first
payment will be applied to interest? To principal? How much of his second payment will
be applied to each?
28. Consider the following timeline detailing a stream of cash flows:

If the current market rate of interest is 8%, then the present value of this stream of cash flows
is closest to:
29. Consider the following timeline detailing a stream of cash flows:
TOPIC 3: TIME VALUE OF MONEY FIN

If the current market rate of interest is 8%, then the future value of this stream of cash flows
is closest to:
30. Joe just inherited the family business, and having no desire to run the family business, he
has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been
offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in
one year, $50,000 in two years, and $75,000 in three years. The current market rate of
interest for Joe is 6%. In terms of present value, how much will Joe receive for selling the
family business?
31. You are saving for retirement. To live comfortably, you decide that you will need $2.5
million by the time you are 65. Today is your 30th birthday, and you decide, starting
today, and on every birthday up to and including your 65th birthday, that you will deposit
the same amount into your savings account. Assuming the interest rate is 5%, the amount
that you must set aside each year on your birthday is closest to
THE END