Tutorial Questions with answers:

Calculating Present Value and Future Value of Cash Flows (compounded annually and non-
annually)

1. What is the future value of $100 after 3 years if interest is 10% annually?
FVn = PV(1 + r)n
100(1.10)3 = $133.10

2. If we place $1000 in a savings account paying 5% interest compounded annually, how

much will our account accrue in 10 years?
FVn = PV(1 + r)n
1000(1.05)10 = $1628.89

3. If you invest $500 in a bank where it will earn 8% compounded annually, how much will
it be worth at the end of seven years?
FVn = PV(1 + r)n
500(1.08)7 =$856.90

4. If we place $100 in a savings account that yields 12% compounded quarterly, what will
our investments grow to at the end of five years?

FVn = PV [1+ i/m]mn

100(1 + 0.12)4 x 5
4
100(1.03)20 = $180.61

5. What is the present value of $500 to be received 10 years from today if our discount
rate is 6%?

PV = FVn [1/(1+i)]n
500(1/1.06)10
500(.5583) = $279.20

6. What is the present value of $100 one year from now with 12% interest compounded
monthly?
 PV = FVn [1/ ( 1+ i )]mn
m
= 100(1/ 1 + 0.12)12 x 1
12
12
100 (1/1.01)
100(0.8874)
= $88.74

7. What is the present value of an investment that yields $500 to be received in five years
and $1000 to be received in 10 years if the discount rate is 4%.

500(1/1.04)5 + 1000(1/1.04)10
500(0.8219) + 1000(0.67556)
410.96 + 675.56 = $1086.52

Calculating Interest and Number of years

1. You would like to purchase a motor car that sells for $20,000, but you currently only
have $7552. How many years will it take for your initial investment of $7552 to grow to
$20000 if it is invested at 9% compounded annually?
FVn
PV0
20000/7552 = 2.58
Look in FVIF tables in the 9% column. Look down the 9% column for value closest to
2.58
Ans = 11 years

2. You currently have $11167 and in ten years time you would like to buy a motor car that
now sells for $20000. At what interest rate must your $11167 be compounded annually
for it to grow to $20000 in ten years?
FVn
PV0
20000/11167
= 1.791
Look in FVIF tables in the 10- year row for a value closest to 1.791
Ans = 6%

3. An investment of an initial outlay of $1000 promises $1629 return after 10 years. What
is the interest rate earned annually?
 FVn
PV0
1629/1000
= 1.629
Look in FVIF tables in the 10- year row for a value closest to 1.629
Ans = 5%

4. How long would it take $1000 invested at 8% to double?

FVn
PV0
2000/1000
= 2.00
Look in FVIF tables in the 8% column. Look down the 8% column for value closest to
2.000.
1.999 is closest at 9 years

Other problem questions

1. What is the future value of $2000 deposited today and left in a bank account for three
years, if it earns 6% annually?

2000(1.06)3
2000(1.191016)
$2382.03

2. What is the future value of $2000 deposited today and left in a bank account for three
years, if it earns 6% compounded semi-annually and 6% compounded quarterly?

2000(1 + 0.06)3 x 2
2
6
2000(1.03)
2000(1.194052)
$2388.10

2000(1 + 0.06)3 x 4
4
 2000(1.015)12
2000(1.259712)
$2391.24

3. Assume that it is now January 1, 2003. On January 1, 2004 you will deposit $1000 in a
savings account that pays 8%.

(a) If the bank compound interest annually, how much will you have in your account on
January 1, 2007?

FV = 1000(1.08)3
1000(1.259712)
$1259.71

(b) What would your January 1, 2007 balance be if the bank used quarterly
compounding rather than annual compounding?

1000(1 + 0.08)3 x 4
4

1000(1.02)12
1000(1.26824)
$1268.24

(c) Suppose you deposited the $1000 in four payments of $250 each on January 1,
2004, 2005, 2006 and 2007. How much will you have in your account on January 1,
2007 based on 8% annual compounding?

PMT(1 +i)n-1 + PMT (1 + i)n-2 + PMT(1+i)n-3 + PMT (1 + i)0

250(1.08)3 + 250(1.08)2 + 250(1.08)1 + 250(1.08)0
314.93 + 291.60 + 270 + 250
$1126.53

(d) Suppose you deposited four equal payments in your bank account on January 1,
2004, 2005, 2006 and 2007. Assuming an 8% interest rate, how large would each of
your payments have to be for you to obtain the same ending balance as you
calculated in part a?
 Hence calculate what your payments have to be per annum to arrive at $1259.71

PMT(1 +i)n-1 + PMT (1 + i)n-2 + PMT(1+i)n-3 + PMT (1 + i)0

PMT(1.08)3 + PMT(1.08)2 + PMT(1.08)1 + PMT(1.08)0
PMT(1.2579) + PMT(1.1664) + PMT(1.08) + PMT = $1259.71

Treat PMT like a missing x value in math and solve for it.

1.2579x + 1.1664x + 1.08x + X = $1259.71

3.5061x + X = $1259.71
4.5061x = $1259.71
X or PMT = 1259.71/4.5061
=$279.56

Or

FVANn = PMT(FVIFAi,n)
FVAN4 = PMT (FVIFA 8%,4years)
$1259.71 = PMT(4.5061)
PMT = 1259.71/4.5061
PMT = $279.56

4. How much must we deposit in an 8% savings account at the end of each year to
accumulate $5000 at the end of 10 years.

FVANn = PMT(FVIFAi,n)
FVAN10 = PMT (FVIFA 8%,10years)
5000 = PMT(14.487)
PMT = 5000/14.487
PMT = $345.14

5. If you deposit $10,000 in a bank account that pays 10% interest annually, how much
money will be in your account after 5 years?

FV5 = $10,000(1.10)5
= $10,000(1.61051) = $16,105.10.

6. What is the present value of a security that promises to pay you $5,000 in 20 years?
Assume that you earn 7% if you were to invest in other securities of equal risk.
 PV = FVn [1/(1+i)n]
5000(1/1.07)20
$1292

7. If you deposit money today into an account that pays 6.5% interest, how long will it take
you to double your money?

Since you want to double your money and the amount is unknown, use 2 for FV and 1
for PV

FVn
PV0
2/1 = 2
You would next look in FVIF tables in the 6.5% column and down the column for the
value closest to 2. You will notice that the table does not have 6.5%, so use the 6%
column. By approximation, the amount will be at 6 years – 1.8983 which is 11 years.

A financial calculator is best used:

2 = 1(1.065)n.
With a financial calculator enter the following: I = 6.5, PV = -1, PMT = 0, and FV = 2.
Solve for N = 11.01 ≈ 11 years.
log 2 = n log 1.065
0.30103 = 0.02734n
n = 11 years

8. Your parents are planning to retire in 18 years. They currently have $250,000 and they
would like to have $1,000,000 when they retire. What annual rate of interest would
they have to earn on their $250,000 in order to reach their goal, assuming they save no
more money?
FVn
PV0

1,000,000/250,000 = 4

Using FVIF tables, locate the row with 18 years under number of periods and look
across that same row for a value closest to 4. This is 3.996 in the column under 8%
 Hence the annual interest rate they would need to invest at is approximately 8%

9. What is the future value of a 5-year ordinary annuity that promises to pay you $300
each year? The rate of interest is 7%.

FVA = PMT [(1 +i)n – 1]

I
300(1.07)5 - 1
I
300(5.7507) = $1725.22

10. Which amount is worth more at 14%, compounded annually: $1,000 in hand today or
$2,000 due in 6 years?

FVn = PV(FVIFi,n)
FVn = 1000(FVIF14%, 6 years)
FV = 1000 * 2.1950
FV = 2,195

There $1,000 would worth more in six years

11. Your client is 40 years old and wants to begin saving for retirement. You advise the
client to put $5,000 a year into the stock market. You estimate that the market’s
return will be, on average, 12% a year. Assume the investment will be made at the end
of the year.

a) If the client follows your advice, how much money will she have by age 65?
b) How much will she have by age 70?

a) Note: 25 years remains until your client reaches 65 years.

FVA = PMT (FVIFA(i,n))
FVA = 5000(FVIFA12%,25yrs)
FVA = 5,000 * 133.33 = 666,650.00

b) FVA = 5000(FVIFA12%,30yrs)
 FVA = 5,000 * 241.33 = 1,206,650

(Similarly, you could use the formula given for annuity if using a calculator –
Remember you can use the tables to solve these questions as well as a regulator
calculator.)

12. Jill currently has $300,000 in a brokerage account. The account pays a 10 percent
annual interest rate. Assuming that Jill makes no additional contributions to the
account, how many years will it take for her to have $1,000,000 in the account?

FVn
PV0
1000000/300000
= 3.33

You would next look in FVIF tables in the 10% column and down the column for the
value closest to 3.333.

Approximately 12/13 years.

13. Today is your 23rd birthday. Your aunt just gave you $1,000. You have used the money
to open up a brokerage account. Your plan is to contribute an additional $2,000 to the
account each year on your birthday, up through and including your 65th birthday,
starting next year. The account has an annual expected return of 14 percent. How
much do you expect to have in the account right after you make the final $2,000
contribution on your 65th birthday?

1000(FVIF14%, 42yrs) + 2000(FVIFA14%41 yrs)

1000(245.47) + 2000(1530.9)

245470 + 3,061,800 = 3,307,270