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Financial Management 1 - Tutorial Irfan

The document contains 9 multi-step word problems involving concepts like present and future value, compound interest, and annuities. The problems are solved using standard formulas to calculate things like the future value of a lump sum investment given an interest rate and number of periods, the present value of a stream of payments, and the number of periods required to reach a future value from an original principal. Detailed step-by-step workings are shown for each problem.

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Dibya saha
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119 views4 pages

Financial Management 1 - Tutorial Irfan

The document contains 9 multi-step word problems involving concepts like present and future value, compound interest, and annuities. The problems are solved using standard formulas to calculate things like the future value of a lump sum investment given an interest rate and number of periods, the present value of a stream of payments, and the number of periods required to reach a future value from an original principal. Detailed step-by-step workings are shown for each problem.

Uploaded by

Dibya saha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1. Five years ago, Leslie had $23,460 in her savings account.

Today, she deposited an


additional $6,000. She plans to deposit another $6,000 into this account next year. How much
money will she have in her account ten years from today if she earns 7.5 percent on her
savings?
Solution:
Formula for Future Value
FV = PV (1+r)t
Future value for $23,460 = $23,460 (1+0.075)15 = $69,415.2627
Future value for $6,000 = $6,000 (1+0.075)10 = $12366.18937
Future value for $6,000= $6,000 (1+0.075)9 = $11503.43197
Total future value of the 3 deposits = $69,415.2627 + $12366.18937 + $11503.43197
= $93,284.88
So, she will have $93,284.88 in her account ten years from today

2. Your grandmother invested one lump sum 42 years ago at 3.5 percent interest. Today, she
gave you the proceeds of that investment which totaled $28,204.37. How much did your
grandmother originally invest?
Solution:
Formula for Present Value
PV = FV/ (1+r)t
= $28,204.37 / (1+0.035)42
= $ 6650
My grandmother originally invested $ 6650 before 42 years

3. You opened a savings account seven years ago and deposited $1,500 at that time. Five
years ago, you added another $1,200 to the account. Today, you deposited an additional
$600. The rate of return is 6 percent compounded annually. How much was your account
worth at the close of business today?
Solution:
Formula for Future Value
FV = PV (1+r)t
Future value for $1,500 = $1,500 (1+0.06)7 = $ 2255.45
Future value for 1,200 = $1,200 (1+0.06)5 = $ 1605.87
Future value for $600= $600 (1+0.06)0 = $ 600
Total future value of the 3 deposits = $ 2255.45 + $ 1605.87 + $ 600
= $4461.32
Total future value of the deposits will be $4461.32.

4. On your thirteenth birthday, you received $1,000 which you invested at 6.5 percent
interest, compounded annually. Your investment is now worth $5,476. How old are you
today?
From the formula FV = PV (1+r)t
$5,476 = $1,000 (1+ 0.065)t
1.065t = 5.476
t log 1.065 = log 5.476
t = ln (5.476) / ln(1.065)
t = 27
It will take 27 years to make $5,476 from $1,000. So today I am (13+27) 40 years old

5. You are going to receive $6,000 at the end of each quarter for the next five years. What is
the net present value of these payments at a discount rate of 7 percent, compounded
quarterly?
Present value of the annuity
PV = 6000 [1-1/ (1.0175)20]/0.0175
PV =6000 x 16.7528
PV = $ 100,517.29
Present value of the annuity is $100,517.29

6. Your parents are giving you $500 a month for five years while you attend college to earn
both a bachelor's and a master's degree. At a 7 percent discount rate, what are these payments
worth to you when you first enter college?
Present value of the annuity
PV = 500 [1-1/ (1.005833)60]/ 0.005833
PV = 500 x 50.5048
PV = 25,252.44
Present value of the annuity is $25,252.44
7. Today you are opening a savings account and depositing an initial $1,000 into it. You plan
to deposit $4,000 into the account one year from today and deposit another $4,000 two years
from today. How much will you have in your account ten years from today if you earn an 8
percent rate of return?
Formula for Future Value
FV = PV (1+r)t
Future value for $1,000 = $1,000 (1+ 0.08)10 = $2158.92
Future value for $4,000 = $4,000 (1+0.08)9 = $7996.02
Future value for $4,000= $4,000 (1+0.08)8 = $7,403.72
Total future value of the 3 deposits = $+ $+ $
= $17,558.66
So, the future value of the deposit will be $17,558.66.

8. You plan to make a series of deposits in an individual retirement account. You will deposit
RM 1,000 today, RM 2,000 in two years, and RM 2,000 in five years. If you withdraw RM
1,500 in three years and RM 1,000 in seven years, assuming no withdrawal penalties, how
much you will have after eight years if the interest rate is 7 percent. What is the present value
of this cash flow?
Formula for Future Value
FV = PV (1+r)t
Future value of RM 1000 @ year 3 = 1000 (1+0.07)3 = 1225.04
Future value of RM 2000 @ year 3 = 1000 (1+0.07)1 = 2140
Total amount @ year 3 = 1225.04 + 2140 – 1500 (withdrawal at year 3)
= RM1865.04
Future value of RM1865.04 @ year 5 = RM1865.04 (1+0.07)2
= 2135.29
Added RM2000 @ year 5.
Total amount at year 5 = 2135.29 + 2000 = RM 4135.29
Future value of RM 4135.29 @ year 7 = RM 4135.28 (1+0.07)2
= 4734.49
Total amount @ year 7 = 4734.49 – 1000 = 3734.49
Total amount at year 8 = 3734.49 (1+0.07) =3995.91
Total amount at year eight will be RM3995.91
Present value of the amount
PV = 3995.91/ (1 + 0.07)8
= RM 2325.65

9. You are looking into an investment that will pay you RM 12,000 per year for the next 10
years. If you require a 15 percent return, what is the most you would pay for this investment?
Present value of the annuity
PV = 12,000 [1-1/ (1.15)10]/0.15
= 12,000 x 5.01876
= RM60,225.22
the most i would pay for this investment is RM60,225.22.

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