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Quiz # 14 Pre-Test Time Value of Money

1) Kay and Arthur's condo will be worth around P75,600 in 5 years if inflation is 8% annually. 2) For Linda to pay her granddaughter P5,000 annually from an account earning 8% interest, she must deposit around P62,500. 3) With a 7% annual return, the wealthy industrialist's P2,000,000 trust will provide P140,000 in annual income for his grandchild.

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Darren Jacob Espina
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189 views1 page

Quiz # 14 Pre-Test Time Value of Money

1) Kay and Arthur's condo will be worth around P75,600 in 5 years if inflation is 8% annually. 2) For Linda to pay her granddaughter P5,000 annually from an account earning 8% interest, she must deposit around P62,500. 3) With a 7% annual return, the wealthy industrialist's P2,000,000 trust will provide P140,000 in annual income for his grandchild.

Uploaded by

Darren Jacob Espina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Quiz # 14 ESPINA

BA 114.1 Financial Accounting & Reporting


Pre-test: Time value of money
I. Problem-Solving. (2 points each unless otherwise stated)
1. Kay and Arthur are newlyweds and have just purchased a condominium for P70,000. Since the condo is very
small, they hope to move into a single-family house in 5 years. How much will their condo worth in 5 years if
inflation is expected to be 8 percent?

2. Linda has decided to set up an account that will pay her granddaughter (Janice) P5,000 a year indefinitely.
How much should Linda deposit in an account paying 8 percent annual interest?

3. A wealthy industrialist wishes to establish a P2,000,000 trust fund which will provide income for his
grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The
grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least
7 percent in all future periods, how much income will the grandchild receive each year?

4. Ethan is operating a Lotto business outside the UP Tacloban Campus. As of the end of the year, Ethan has
collected P50 million in lotto sales. Students were constantly buying tickets from Ethan’s outlet as a stress
reliever for failing in various everyday quizzes and exams. Juan was an example of such student. With a
stroke of luck, Juan won the Lottery which was valued at P50 million. The payout will be P5 million at the
end of each year for 10 years. The expenses of running the lottery were P800,000. Assuming that Ethan can
earn an annual compound rate of 8 percent on any funds invested:
(a) Calculate the gross profit of Ethan from this lottery venture.
(b) Calculate the net profit to Ethan from his lottery business.

5. In their meeting with their advisor, Mr. & Mrs. Smith concluded that they would need P40,000 per year
during their retirement years in order to live comfortably. They will retire 10 years from now and expect a 20-
year retirement period. How much should Mr. & Mrs. Smith deposit now in a bank account paying 9 percent
to reach financial happiness during retirement? (5 points)

6. Suzy wants to buy a house but does not want to get a loan. The average price of her dream house is P500,000
and its price is growing at 5 percent per year. How much should Suzy invest in a project at the end of each
year for the next 5 years in order to accumulate enough money to buy her dream house with cash at the end of
the fifth year? Assume the project pays 12 percent rate of return. (5 points)

7. Assume that you will receive P2,000 a year in Years 1 through 5, P3,000 a year in Years 6 through 8, and
P4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of
return, what is the present value of these cash flows? (5 points)

8. Today is Janet’s 23rd birthday. Starting today, Janet plans to begin saving for her retirement. Her plan is to
contribute P1,000 to a brokerage account each year on her birthday. Her first contribution will take place
today. Her 42nd and final contribution will take place on her 64th birthday. Her aunt has decided to help
Janet with her savings, which is why she gave Janet P10,000 today as a birthday present to help get her
account started. Assume that the account has an expected annual return of 10 percent. How much will Janet
expect to have in her account on her 65th birthday? (5 points)

9. Jay is 30 years old and will retire at age 65. He will receive retirement benefits but the benefits are not going
to be enough to make a comfortable retirement life for him. Jay has estimated that an additional $25,000 a
year over his retirement benefits will allow him to have a satisfactory life. How much should Jay deposit
today in an account paying 6 percent interest to meet his goal? Assume Jay will have 15 years of retirement.
(5 points)

10. Jeanne has just graduated from high school and has received an award for $5,000. She would like to deposit
the money in an interest earning account until she graduates from college (i.e., four years from now). In her
search for the highest interest earning account, she has narrowed the list down to the following two accounts:
1) bank A pays 9 percent interest compounded annually, and 2) bank B pays 8 percent interest compounded
semiannually. Which is the better offer, and how much will Jeanne have upon graduation from college? (5
points)

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