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    Time Value Money Questions Answers

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    smsmba
    1. The present value of the car payment stream with an 8% interest rate was $22,405.40. 2. The deposit amount needed to provide $14,000 per year for 4 years at 8.5% interest is $45,858.35. The account balance after the third withdrawal would be $12,903.43. 3. The present value of a $2 million annual lottery payment over 5 years with a 7% interest rate is $8.774 million.

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    Time Value Money Questions Answers

    Uploaded by

    smsmba
    2K views10 pages
    1. The present value of the car payment stream with an 8% interest rate was $22,405.40. 2. The deposit amount needed to provide $14,000 per year for 4 years at 8.5% interest is $45,858.35. The account balance after the third withdrawal would be $12,903.43. 3. The present value of a $2 million annual lottery payment over 5 years with a 7% interest rate is $8.774 million.

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    1. The present value of the car payment stream with an 8% interest rate was $22,405.40. 2. The deposit amount needed to provide $14,000 per year for 4 years at 8.5% interest is $45,858.35. The account balance after the third withdrawal would be $12,903.43. 3. The present value of a $2 million annual lottery payment over 5 years with a 7% interest rate is $8.774 million.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views10 pages

    Time Value Money Questions Answers

    Uploaded by

    smsmba
    1. The present value of the car payment stream with an 8% interest rate was $22,405.40. 2. The deposit amount needed to provide $14,000 per year for 4 years at 8.5% interest is $45,858.35. The account balance after the third withdrawal would be $12,903.43. 3. The present value of a $2 million annual lottery payment over 5 years with a 7% interest rate is $8.774 million.

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    of 10

    Time Value of Money

    Question # 1
    You sold a car and accepted a note with the following cash flow stream as your payment. What
    was the effective price you received for the car assuming an interest rate of 8%?

    Years:

    0
    |
    $0

    CFs:

    1
    |
    $1,500

    Ans 1.

    FV = PV (1 + I)n
    PV=FV/

    (1 + I)n

    PV1=1500/1.08

    PV1=$1388.88---------------------1
    PV2= 2000/(1.08) 2
    PV2=1714.67

    $ 2

    PV3= 22000/ 1.08 3

    PV3=$ 17464.309-----------3
    PV4= 2500/(1.08)

    PV4= $1837.5-----------------------4
    Now

    adding all four values of eq 1,2,3 & 4

    P(total)= $ 22405.4

    2
    |
    $2,000

    3
    |
    $2,2000

    4
    |
    $2,500

    Question # 2
    To complete your last year in business school and then go through law school, you will need
    $14,000 per year for 4 years, starting next year (that is, you will need to withdraw the first
    $14,000 one year from today). Your rich uncle offers to put you through school, and he will
    deposit in a bank paying 8.5% interest, compounded annually, a sum of money that is sufficient
    to provide the 4 payments of $14,000 each. His deposit will be made today.
    a) How large must the deposit be?
    b) How much will be in the account immediately after the sthird withdrawal?
    Ans2

    PV

    14000

    14000

    14000

    14000

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


    where
    PVA=?
    i=8.5%
    PMT=$ 14000
    n=4
    Putting values in eq 1
    PV=14000

    (1 / (1 + .085)4)) / 0.085]

    PVA= $ 45858.35ans to part a

    Now for part b amortization table is required


    years

    Beginning

    installment

    interest

    principle

    ending principle

    amount

    amount

    45858.35

    ----

    45858.35

    14000

    3898

    10102

    35756.35

    35756.35

    14000

    3039.28

    10960.7

    24795.789

    24795.789

    14000

    2107.642

    11892.35

    12903.43

    12903.43

    14000

    1096.57

    12903.43

    Ans for part b is

    -----

    ------

    45858.35

    12903.43$

    Question # 3
    The prize in last weeks Florida lottery was estimated to be worth $10 million. If you were lucky
    enough to win, the state will pay you $2 million per year over the next 5 years. Assume that the
    first installment is received immediately. If the interest rates are 7 percent, what is the present
    value of the prize?
    Ans #3

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


    PMT= 2 million
    I=7%
    N= 5 years
    PVA=?
    Putting values in eq 1
    PVA = 2 [(1 - (1 / (1 + 0.07)5)) / 0.07]
    PVA= 8.774 million

    Question # 4
    An investment pays you $800 at the end of each of the next 3 years. The investment will then
    pay you $900 at the end of Year 4, $950 at the end of Year 5, and $990 at the end of Year 6. If
    the interest rate earned on the investment is 6 percent, what is its present value? What is its
    future value?
    Ans #4

    Future value

    FV = PV (1 + i)n
    FV1 = 800 (1 + .06)5
    FV2 = 800 (1 + .06)4

    = $1070.58
    = $1009.98

    FV3 = 800 (1 + .06)3 = $952.81


    FV4 = 900 (1 + 0.06)2 =$1011.24
    FV 5= 950 (1 +0.06 )1= $1007
    FV6 = $990
    FV (Total)= $ 6041.61

    Present value

    FV = PV (1 + I)n

    PV = FV / (1 + I)n
    PV1 = FV / (1 + I)n
    PV1 = 800 / (1 + 0.06)1
    PV1 = $754
    PV2 = 800 / (1 + 0.06)2
    PV2 = $711
    PV3 = 800 / (1 + 0.06)3
    PV3 = $671.69
    PV4 = 900 / (1 + 0.06)4
    PV4 = $ 712.88
    PV5 = 950 / (1 + 0.06)5
    PV5 = $ 709.84
    PV6 = 990 / (1 + 0.06)6
    PV6 = $ 679.91

    Question # 5
    Your company is planning to borrow $8,000,000 on a 5-year, 11% annual payment fully
    amortized term loan. Prepare an amortization table to show the full payments for five years along
    with breakdown of each payment into interest and reduction in principal amount.
    Ans #5

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


    PVA= $ 8000000
    I= 11%
    N=5
    So
    PMT from eq 1
    PMT= $ 2164502.165

    Years

    Begning
    amount

    Installment

    INTREST

    Principal
    amount

    Ending
    amount

    8000000

    ------

    ------

    ------

    8000000

    8000000

    2164502.17

    880000

    1284502.17

    6715497.83

    6715497.83

    2164502.17

    738704.76

    1425797.41

    5289700.42

    5289700.42

    2164502.17

    581867.046

    1582635.124

    3707065.29

    3707065.296

    2164502.17

    407777.18

    1756724.987

    1950340.309

    1950340.309

    2164502.17

    214161.86

    1950340.309

    ----nil----

    Question # 6
    After graduation, you plan to work for a company for 15 years and then start your own business.
    You expect to save and deposit $5,000 a year for the first 8 years (t = 1 through t = 8) and $8,000
    annually for the following 7 years (t = 9 through t = 15). The first deposit will be made a year
    from today. In addition, your grandfather just gave you a $20,000 graduation gift which you will
    deposit immediately (t = 0). If the account earns 7% compounded annually, how much will you
    have when you start your business 15 years from now?
    Ans #6

    FV = PV (1 + I)n
    as $ 20000 graduation gift at t=0 so future value at t= 15 will be

    FV = 20000 (1 + 0.07)15
    FV1 = $ 55180.630.1

    Deposit pf $ 5000 for 8 years


    so PMT= $ 5000
    n=8
    i=7%

    FV(t=1 to t=8) = PMT [((1 + i)n - 1) / i]


    FV(t=1 to t=8) = 5000 [((1 + 0.07)8 - 1) / 0.07]
    FV(t=1 to t=8) = $ 51299
    As the amount will be in account for next 7 more years i.e t= 9 to 15 so
    Future value of $ 5000 annuity at 15 years will be

    FV = 51299 (1 + 0.07)7
    FV (at t=15) = $ 82374.98--------2

    Now for PMT= $ 8000 for 7 years future value will be


    FVA(t=9 to t=15) = PMT [((1 + i)n - 1) / i]

    FVA(t=9 to t=15) = 8000 [((1 + 0.07)7 - 1) / 0.07]


    FVA(t=9 to t=15) = $ 69232.168 .3
    Now adding three eqs 1,2 and 3
    FV total at 15th year will be=
    55180.63 + 82374.98+69232.168= $ 206787.7

    ...........

    Question # 7
    Your sister turned 32 today, and she is planning to save $12,000 per year for retirement, with the
    first deposit to be made one year from today. She will invest in a mutual fund that's expected to
    provide a return of 6.5% per year. She plans to retire when she turns 65, and she expects to live
    for 20 years after retirement, to age 85. Under these assumptions, how much can she spend each
    year after she retires? Her first withdrawal will be made at the end of her first retirement year.
    Ans # 7

    FVA(t=32 to t=65) = PMT [((1 + i)n - 1) / i]


    N= 33
    I= 0.065
    PMT= $ 12000
    FVA(t=32 to t=65) = 12000 [((1 + 0.065)33 - 1) / 0.065]
    FVA(at t=65) = $ 1290428.5
    Now at t= 65th year my FVA will be my PVA

    PVA= $ 1290428.5
    PMT= ?
    N= 20
    I= 7%
    PVA = PMT [(1 - (1 / (1 + i)n)) / i]
    1290428.5=PMT(11.0185)
    PMT=$ 117114.63
    She can spend $ 117114.63

    Question # 8
    You just deposited $6,500 in a bank account that pays a 9% interest rate, compounded quarterly.
    If you also add another $8,000 to the account one year (4 quarters) from now and another $9,500
    to the account two years (8 quarters) from now, how much will be in the account three years (12
    quarters) from now?

    I= 9% annually or for quarterly=0.09/4=0.0225


    n=3 years or 3x4= 12

    FV = PV (1 + I)n
    FV(for $ 6500at t=3 years) = 6500 (1 + .0225)12
    FV(for $ 6500at t=3 years) = $8489.32
    FV( for $ 8000 at 2 year)= 8000 (1 + .0225)8
    FV( for $ 8000 at 2 year)= $ 9558.64

    FV( for $9500 at 1 year)= 9500 (1 + .0225)4


    FV( for $ 8000 at I year)= $ 10384.29
    FV
    (Total
    at
    3
    years
    or
    $8489.32+$ 9558.64+$ 10384.29= $ 28432.25

    at

    12th

    quater)=

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