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Workshop 3 Questions11

The document contains examples of calculating compound interest and time value of money concepts over multiple time periods and interest rates. It includes questions about calculating future and present values, compounding periods, interest rates, and time to reach an investment goal.

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15 views2 pages

Workshop 3 Questions11

The document contains examples of calculating compound interest and time value of money concepts over multiple time periods and interest rates. It includes questions about calculating future and present values, compounding periods, interest rates, and time to reach an investment goal.

Uploaded by

karthikjayaprakas3
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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The Time Value of Money

1. Multiple compounding periods (FV): Normandy Textiles had a cash inflow of €1


million, which it needs for a long-term investment at the end of one year. It plans to deposit
this money in a bank that pays daily interest at 3.75 per cent per year. What will be the value
of the investment at the end of the year? (Round to the nearest euro.)
a. €1 211 375
b. €1 000 103
c. €1 037 500
d. €1 038 210

FV=€1,000,000×(1+ 365/0.0375 ) ^365×1


FV≈€1,000,000×1.03821
FV≈€1,038,210

2. Compounding: Dat Nguyen is depositing €17 500 in an account paying an annual interest
rate of 8.25 per cent per year compounded monthly. What is the interest-on-interest after six
years?
a. €8 662.50
b. €10 925
c. €2 497.63
d. €1 092.48

3. Present value: Jack Robbins is saving for a new car. He needs to have €21 000 for the car
in three years. How much will he have to invest today in an account paying 8 per cent
annually to achieve his target? (Round to nearest euro.)
a. €22 680
b. €26 454
c. €16 670
d. €19 444
Answer found in excel
Fv =21000
R =0.08
T =3

4. Multiple compounding (PV): You need to have €15 000 in five years to payoff a home
loan. You can invest in an account that pays 5.75 per cent per year compounded quarterly.
How much will you have to invest today to attain your target in five years? (Round to the
nearest euro.)
a. €4 903
b. €11 275
c. €14 184
d. €12 250
Answer found in excel
Fv =-15000
R = 0.0575
T =20

1
5. Interest rate: Rachael Steele wants to borrow €6 000 for a period of four years. She has
two choices. Her bank is offering to lend her the amount at 7.25 per cent compounded
annually. She can also borrow from her employer and will have to repay a total of €8 130.93
at the end of four years. Should Rachael go with her bank or her employer and what is the
interest rate if she borrows from her employer? (Round to the nearest per cent.)
a. Bank: 9%
b. Employer: 7%
c. Bank: 8%
d. Employer: 6%

6. Growth rate: Trojan Traps manufactures an innovative mouse trap. Sales this year are
€325 000. The company expects its sales to go up to €500 000 in five years. What is the
expected growth rate in sales for this firm? (Round to the nearest per cent.)

a. 9%
b. 11%
c. 6%
d. 12%
CAGR= (ending value/ beginning value) ^( 1/ number of years )- 1
= 500000/325000 ^0.2 -1
= 9%
7. Time to attain goal: Your uncle is looking to double his investment of €10 000. He claims
he can get earn 14 per cent per year on his investment. How long will it be before he can
double his investment? Use the Rule of 72 and round to the nearest year.
a. 5 years
b. 14 years
c. 10 years
d. None of the above

=72/ 14
=5.14
=5 years

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