Question #1

Paula purchased a house for 300,000. After providing a 20% down payment, she borrowed the
balance from the local savings and loan under a 30-year 6% mortgage loan requiring equal
monthly installments at the end of each month. Which time value concept would be used to
determine the monthly payment?
Future value of an ordinary annuity.

Present value of one.

Future value of one.

Present value of an ordinary annuity.

Corporate Finance - Time Value of Money (Average)

Question #2

Your family purchased a house three years ago. When you bought the house you financed it with
a P160,000 mortgage with an 8.5 percent nominal interest rate (compounded monthly). The
mortgage was for 15 years (180 months). What is the remaining balance on your mortgage
today?
141,937 95,649 103,300 125,745 159,998

Solution:
Solve for the monthly payment as follows: N = 12 ?6? 15 = 180; I = 8.5/12 = 0.7083; PV =
-160000; FV = 0; PMT = P1,575.58. Use the calculators amortization feature to find the
remaining principal balance: 1 INPUT 36 n AMORT = displays Int: P38,658.34 = displays Prin:
P18,062.54 = displays Bal: P141,937.46.
Corporate Finance - Time Value of Money (Difficult)

Question #3

In 1958 the average tuition for one year at an Ivy League school was P1,800. Thirty years later,
in 1988, the average cost was P13,700. What was the growth rate in tuition over the 30-year
period?
12% 8% 9% 7% 6%

Solution:
Financial calculator solution: Inputs: N = 30; PV = -1800; PMT = 0; FV = 13700. Output: I =
7.0%.
Corporate Finance - Time Value of Money (Difficult)

Question #4

Which of the following is true?

None of these.

Rents occur at the beginning of each period of an annuity due.

Rents occur at the end of each period of an annuity due.

Rents occur at the beginning of each period of an ordinary annuity.

Corporate Finance - Time Value of Money (Easy)

Question #5

Betty wants to know how much she should begin saving each month to fund her retirement.
What kind of problem is this?
Future value of one.

Present value of one.

Present value of an ordinary.

Future value of an ordinary annuity.

Corporate Finance - Time Value of Money (Average)

Question #6

What would you pay for an investment that pays you 12,000 at the beginning of each year for the
next ten years? Assume that the relevant interest rate for this type of investment is 10%.
73,734

85,735

81,108
 77,941

Solution:
12,000 6.75902 = 81,108
Corporate Finance - Time Value of Money (Easy)

Question #7

A real estate investment has the following expected cash flows:

Year Cash Flows

1 P10,000

2 25,000

3 50,000

4 35,000
The discount rate is 8 percent. What is the investments present value?
103,799 95,353 96,110 120,000

Solution:
NPV = P10,000/1.08 + P25,000/(1.08)2 + P50,000/(1.08)3 + P35,000/(1.08)4 = P9,259.26 +
P21,433.47 + P39,691.61 + P25,726.04 = P96,110.38 Financial calculator solution: Using cash
flows Inputs: CF0 = 0; CF1 = 10000; CF2 = 25000; CF3 = 50000; CF4 = 35000; I = 8. Output:
NPV = P96,110.39
Corporate Finance - Time Value of Money (Difficult)

Question #8

An investment pays you 9 percent interest compounded semiannually. A second investment of

equal risk, pays interest compounded quarterly. What nominal rate of interest would you have to
receive on the second investment in order to make you indifferent between the two investments?
9.31% 8.71% 9.00% 8.90% 9.20%

Solution:
1st investment: Enter the following: NOM% = 9; P/YR = 2; and then solve for EFF% =
9.2025%. 2nd investment: Enter: EFF% = 9.2025; P/YR = 4; and solve for NOM% = 8.90%.
Corporate Finance - Time Value of Money (Difficult)

Question #9

You recently took out a 30-year (360 months), P145,000 mortgage. The mortgage payments are
made at the end of each month and the nominal interest rate on the mortgage is 7 percent. After
five years (60 payments), what will be the remaining balance on the mortgage?
143,527 136,491 87,119 136,172 136,820

Solution:
Step 1: Calculate the monthly mortgage payment: N = 360; I = 7/12 = 0.5833; PV = -145000; FV
= 0; and then solve for PMT = P964.6886. Step 2: Develop the amortization schedule using the
calculators amortization feature: 5 x 12 = 60 payments 1 INPUT 60 n AMORT = displays Int:
P49,372.1225 = displays Prin: P8,509.1935= displays Bal: P136,490.8065 = P136,491.
Corporate Finance - Time Value of Money (Difficult)

Question #10

For which of the following transactions would the use of the present value of an ordinary annuity
concept be appropriate in calculating the present value of the asset obtained or the liability owed
at the date of incurrence?
A capital lease is entered into with the initial lease payment due one month subsequent

to the signing of the lease agreement.

A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2

and July 1 yielding 9%.

A capital lease is entered into with the initial lease payment due upon the signing of the lease

agreement.
A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2

and July 1 yielding 7%.

Corporate Finance - Time Value of Money (Difficult)

Question #11

Which one of the following investments provides the highest effective rate of return?
 An investment that has a 10 percent nominal rate and semiannual compounding. An

investment that has a 9.6 percent nominal rate and monthly compounding. An investment

that has a 9.9 percent nominal rate and quarterly annual compounding. An investment

that has a 10.2 percent nominal rate and annual compounding. An investment that has a 9.7

percent nominal rate and daily (365) compounding.

Solution:
Convert each of the alternatives to an effective annual rate (EAR) for comparison. This problem
can be solved with either the EAR formula or a financial calculator. An investment that has a 9.9
percent nominal rate and quarterly annual compounding: EAR = 10.2736%. An investment that
has a 9.7 percent nominal rate and daily (365) compounding: EAR = 10.1846%. An investment
that has a 10.2 percent nominal rate and annual compounding: EAR = 10.2000%. An investment
that has a 10 percent nominal rate and semiannual compounding: EAR = 10.2500%. An
investment that has a 9.6 percent nominal rate and monthly compounding: EAR = 10.0339%.
Corporate Finance - Time Value of Money (Difficult)

Question #12

On January 1, 2013, Nino Co. sold to Miguel Corp. 400,000 of its 10% bonds for 354,118 to
yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Nino
report as interest expense for the six months ended June 30, 2013?
20,000

17,706

21,247

24,000

Solution:
354,118 .06 = 21,247
Corporate Finance - Time Value of Money (Easy)

Question #13

Robert recently borrowed P20,000 to purchase a new car. The car loan is fully amortized over 4
years. In other words, the loan has a fixed monthly payment, and the loan balance will be zero
after the final monthly payment is made. The loan has a nominal interest rate of 12 percent with
monthly compounding. Looking ahead, Robert thinks there is a chance that he will want to pay
off the loan early, after 3 years (36 months). What will be the remaining balance on the loan after
he makes the 36th payment?
4,746.44 7,915.56 5,541.01 5,927.59 4,003.85

Solution:
Find the payment of the mortgage first. N = 48; I/YR = 12/12 = 1; PV = 20000; FV = 0; and then
solve for PMT = P526.68. Use the calculators amortization feature to find the remaining loan
balance: 3 years = 3 x 12 = 36 payments. 1 INPUT 36 n AMORT = displays Int: P4,888.07 =
displays Prin: P14,072.41 = displays Bal: =P5,927.59.
Corporate Finance - Time Value of Money (Difficult)

Question #14

Which statement is false?

The factor for the present value of an annuity due is found by adding 1.00000 to the ordinary

annuity table value for one less period.

The factor for the present value of an annuity due is found by multiplying the ordinary

annuity table value by one minus the interest rate.

The factor for the future value of an annuity due is found by subtracting 1.00000 from the

ordinary annuity table value for one more period.

The factor for the future value of an annuity due is found by multiplying the ordinary

annuity table value by one plus the interest rate.

Corporate Finance - Time Value of Money (Average)

Question #15

Alfred Co. is issuing 2.6 million 12% bonds in a private placement on July 1, 2010. Each 1,000
bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in
ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%.
What is the expected selling price of the bonds?
3,297,839

3,324,385

5,426,797
 3,306,705

Solution:
(2,600,000 .45639) + (156,000 13.59033) = 3,306,705
Corporate Finance - Time Value of Money (Average)

Question #16

On May 1, 2013, a company purchased a new machine which it does not have to pay for until
May 1, 2014. The total payment on May 1, 2014 will include both principal and interest.
Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied
by what time value of money factor?
Future value of annuity of 1

Future value of 1

Present value of annuity of 1

Present value of 1

Corporate Finance - Time Value of Money (Easy)

Question #17

Kurt is in the process of purchasing a car. The list price of the car is 32,000. If Kurt pays cash for
the car, the dealer will reduce the price by 10%. Otherwise, the dealer will provide financing
where Jeremy must pay 6,850 at the end of each of the next five years. Compute the effective
interest rate to the nearest percent that Kurt would pay if he chooses to make the five annual
payments?
8%

7%

5%

6%

Solution:
(32,000 .90) 6,850 = 4.20438, 4.20438 is PV factor for 6%.
Corporate Finance - Time Value of Money (Average)

Question #18

A 30-year, P175,000 mortgage has a nominal interest rate of 7.45 percent. Assume that all
payments are made at the end of each month. What will be the remaining balance on the
mortgage after 5 years (60 monthly payments)?
106,331 165,498 210,705 63,557 101,942

Solution:
Step 1: Calculate the mortgages monthly payment: Enter the following data in the calculator: N =
360; I = 7.45/12 = 0.6208; PV = -175000; FV = 0; and then solve for PMT = P1,217.64. Step
Calculate the remaining balance on the mortgage after 60 monthly payments by using
thecalculators amortization feature: 1 INPUT 60 n AMORT = displays Int: P63,556.53 = displays
Prin: P9,501.84 = displays Bal: P165,498.16 = P165,498.
Corporate Finance - Time Value of Money (Difficult)

Question #19

Francis Leasing purchases and then leases small aircraft to interested parties. The company is
currently determining the required rental for a small aircraft that cost them 400,000. If the lease
is for twenty years and annual lease payments are required to be made at the end of each year,
what will be the annual rental if Francis wants to earn a return of 10%?
42,713

20,209

6,984

46,984

Solution:
400,000 8.51356 = 46,984
Corporate Finance - Time Value of Money (Average)

Question #20

What is the primary difference between an ordinary annuity and an annuity due?
 The timing of the periodic payment.

Annuity due only relates to present values.

The interest rate.

Ordinary annuity only relates to present values.

Corporate Finance - Time Value of Money (Easy)