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Time Value of Money-Answer Key

The document discusses calculating present and future values of investments using different interest rates and time periods. It also discusses calculating interest rates, number of periods, annuity values, and compares investment criteria like net present value and internal rate of return to evaluate projects.

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Brian
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243 views12 pages

Time Value of Money-Answer Key

The document discusses calculating present and future values of investments using different interest rates and time periods. It also discusses calculating interest rates, number of periods, annuity values, and compares investment criteria like net present value and internal rate of return to evaluate projects.

Uploaded by

Brian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Calculating Future Values

For each of the following, compute the future value

Input area: Output area:

Present value Years Interest rate Future value


$ 2,250 16 10% $10,338.69
8,752 13 8% $23,802.15
76,355 4 17% $143,080.66
183,796 12 7% $413,943.81
Calculating Present Values
For each of the following, compute the present value

Output area: Input area:

Present value Years Interest rate Future value


$12,211.15 6 4% $ 15,451
$24,832.86 7 11% 51,557
$13,375.22 23 20% 886,073
$60,964.94 18 13% 550,164
Calculating Interest Rates
Assume the total cost of a college education will be $280,000 when your child enters college in
18 years. You presently have $50,000 to invest. What annual rate of interest must you earn on
your investment to cover the cost of your child's college education?

Input area: Output area:

Present value Years Interest rate Future value


$ 50,000 18 10.04% $ 280,000
ld enters college in
must you earn on
Calculating the Number of Periods
You're trying to save to buy a new $170,000 Ferrari. You have $40,000 today that
can be invested at your bank. The bank pays 6.2% annual interst on its accounts.
How long will it be before you have enough to buy the car?

Input area: Output area:

Present value Years Interest rate Future value


$ 40,000 24.05 6.20% $ 170,000
Present Value and Multiple Cash Flows
Sunny County has identified an investment project
with the following cash flows. If the discount rate is
10%, what is the present value of these cash flows?
What is the present value at 18%? At 24 percent?

Input area:
Output area:

Discount rate 10% Discount

Year Cash flow Year


1 $ 1,100 1
2 720 2
3 940 3
4 1,160 4
$3,093.57
18% Discount 24%

Cash flow Year Cash flow


$ 1,100 1 $ 1,100
720 2 720
940 3 940
1,160 4 1,160
$2,619.72 $2,339.03
Calculating Annuity Values
If you deposit $3,000 at the end of each of the next 20 years into
an account paying 10.5% interest, how much money will you have
in the account in 20 years? How much will you have if you make
deposits for 40 years?

Input area:

Interest rate on annuity 10.5%


# of years 20
Annual deposit $ 3,000

Output area:

Future value $181,892.42


Interest rate on annuity 10.5%
# of years 40
Annual deposit $ 3,000

Output area:

Future value $1,521,754.74


Calculating Annuity Values
You want to have $80,000 in your savings account 10
years from now, and you're prepared to make equal
annual deposits into the account at the end of each
year. If the account pays 6.5% interest, what amount
must you deposit each year?

Input area:

Interest rate 6.5%


# of years 10
Desired amount $ 80,000

Output area:

Annual deposit $5,928.38


Comparing Investment Criteria
Sunny County has identified the following two mutually exclusive projects:

Annual cash flows: A B


Year 0 $ (350,000) $ (35,000)
Year 1 $ 25,000 $ 17,000
Year 2 $ 70,000 $ 11,000
Year 3 $ 70,000 $ 17,000
Year 4 $ 430,000 $ 11,000

Required return 15%

a. If you apply the payback criterion, which investment will you choose, why?
b. If you apply the discounted payback criterion, which investment will you choose, why?
c. If you apply the NPV criterion, which investment will you choose, why?
d. If you apply the IRR criterion, which investment will you choose, why?
e. Based on your answers, which project will you finally choose, why?

Output area:

a NPV (A) $16,549.22


NPV (B) $5,567.25
NPV criterion implies accept A
because it has a higher NPV.

b IRR (A) 16.57%


IRR (B) 23.05%
IRR decision rule implies accept B
because its IRR is greater.
u choose, why?

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