Math – FV

 1. How much money will you have in 5 years if you invest $100 today at a 10% rate of return?

Ans. FV = $100 * (1+.1)5 = FV = $161.05

2. consider an investment which promises to pay $100 one year from now, $300 two years from
now, 500 three years from now and $1000 four years from now. How much will be the future
value of the cash flow streams at the end of year 4, given that the interest rate is 10%,?

Ans.
n
n-t
FV = S [CF * (1+r) ]
t
t=0

OR
n-1 n-2 n3 n-4
FV = [CF *(1+r) ]+[CF *(1+r) ]+ [CF *(1+r) ] + [CF *(1+r) ]
1 2 3 4

FV = [$100*(1+.1)4-1]+[$300*(1+.1)4-2]+[$500*(1+.1)4-3] +[$1000*(1+.1)4-4]

FV = $133.10 + $363.00 + $550.00 + $1000

FV = $2046.10
3. Find the Future Value at the end of year 4 of the following cash flow stream given that the
interest rate is 10%.
Ans.

4. What amount will accumulate if we deposit $5,000 at the end of each year for the next 5
years? Assume an interest of 6% compounded annually
PV = 5,000
i = .06
n=5
Ans.

Year 1 2 3 4
 Begin 0 5,000.00 10,300.00 15,918.00

Interest 0 300 618 955.08

Deposit 5,000.00 5,000.00 5,000.00 5,000.00

End 5,000.00 10,300.00 15,918.00 21,873.08

 1  r n  1
FVordianryAnnuity  CF  
 r 
 1  0.06 5  1 
FVoa  5000  
 0.06 
 1.06 5  1 
FVoa  5000  
 0.06 
1.3382255776  1 
FVoa  5000  
=  0.06
 0.3382255776 
FVoa  5000  
=  0.06

= FVoa  50005.63709296

FVoa  28185.4648

5. Find out the future values (FV) in the following situations :

a) At the end of 3 years, how much is an initial deposit of Taka 1,000 worth, assuming a
compounded interest rate of (i) 10%; (ii) 20% and (ii) 100%.
b) At the end of 10 years, how much is an initial investment of Taka 1,000 worth, assuming
an interest rate of 10% compounded : (i) annually;

6.What amount will accumulate if we deposit $5,000 at the beginning of each year for the next
5 years? Assume an interest of 6% compounded annually.
PV = 5,000, i = .06, n = 5

Year 1 2 3 4 5

Begin 0 5,300.00 10,918.00 16,873.08 23,185.46

 Interest 0 300 618 955.08 1,312.38

Deposit 5,000.00 5,000.00 5,000.00 5,000.00 5,000.00

End 5,000.00 10,300.00 15,918.00 21,873.08 28,185.46

FVoa= 28185.46 ((1.06) = 29,876.59

Begin 5,000.00 10,300.00 15,918.00 21,873.08 28,185.46

Deposit 5,000.00 5,000.00 5,000.00 5,000.00 5,000.00

Interest 300 618 955.08 1,312.38 1,691.13

End 5,300.00 10,918.00 16,873.08 23,185.46 29,876.59

7.What amount will accumulate if we deposit $1,000 at the beginning of each
year for the next 5 years? Assume an interest of 5% compounded annually.
PV = 1,000
i = .05
n=5
8.
Ans.

9. Suppose you’re offered the following two options to pick from:

Option 1 → Receive $225,000 in Year 4

Option 2 → Receive $50,000 from Year 1 to Year 4

The determinant of which option is more profitable is the time value of money (TVM).

If we assume a 10% discount rate, which option should you proceed with?
For both option 1 and option 2, we’ll list out the cash inflow for each year.

While option 1 consists of a one-time payment of $225,000, option 2 consists of four payments
of $50,000.
The formula for discounting each cash flow is the future value (FV) divided by (1 + discount
rate), which is then raised to the power of the period number.

Once completed for each year, the sum of the discounted cash flows equals the present value of
the option, i.e. how much the future cash flows are worth on the present date.

Option 1 = $154,000

Option 2 = $158,000
In our simple example, option 2 is worth more than option 1. But of course, there are far more
considerations in reality that can complicate the decision-making process.

10. If Fred Moreno places $100 in a savings account paying 8% interest

compounded annually, at the end of 1 year he will have $108 in the account, which
is the initial principal of $100 plus 8% ($8) in interest. The future value at the end
of the first year is
Future value at end of year 1 = $100 * (1 + 0.08) = $108
If Fred were to leave this money in the account for another year, he would be paid
interest at the rate of 8% on the new principal of $108. At the end of this second
year, there would be $116.64 in the account. This amount would represent the
principal at the beginning of year 2 ($108) plus 8% of the $108 ($8.64) in interest.
The future value at the end of the second year is
Future value at end of year 2 = $108 * (1 + 0.08)
= $116.64
Substituting the expression $100 3 (1 1 0.08) from the first-year calculation for the
$108 value in the second-year calculation gives us
Future value at end of year 2 = $100 * (1 + 0.08) * (1 + 0.08)
= $100 * (1 + 0.08)2
= $116.64

11. Fran Abrams is evaluating two annuities. Both are 5-year,

$1,000 annuities; annuity A is an ordinary annuity, and annuity B is an annuity
due. To better understand the difference between these annuities, she has listed
their cash flows in the Table. The two annuities differ only in the timing of their
cash flows: The cash flows occur sooner with the annuity due than with the
ordinary annuity.
 Annual cash flows

Year Annuity A (ordinary) Annuity B (annuity due)

0 $ 0 $1,000

1 1,000 1,000

2 1,000 1,000

3 1,000 1,000

4 1,000 1,000

5 1,000 0

Totals $5,000 $5,000

12. Fran Abrams wishes to determine how much money she will have at the end of 5 years if she
chooses annuity A, the ordinary annuity. She will deposit $1,000 annually, at the end of each of
the next 5 years, into a savings account paying 7% annual interest. This situation is depicted on
the following time line.

$1,000 $1,000 $1,000 $1,000 $1,000

0 1 2 3 4 5
End of Year

$1,310.80
1,225.04
1,144.90
1,070.00
1,000.00
$5,750.74 Future Value

As the figure shows, at the end of year 5, Fran will have $5,750.74 in her ac-count. Note that
because the deposits are made at the end of the year, the first deposit will earn interest for 4
years, the second for 3 years, and so on. Plugging the relevant values we have

3 (1 + 0.07)5 - 1 4
FV5 = $1,000 * e f = $5,750.74
0.07

A B
1 FUTURE VALUE OF AN ORDINARY
ANNUITY
2 Annual annuity payment –$1,000
3 Annual rate of interest 7%
4 Number of years 5
5 Future value $5,750.7
4
Entry in Cell B5 is =FV(B3,B4,B2,0,0).
The minus signseappears before payments
the annuity’s the $1,000

13. Ramesh Abdul wishes to choose the better of two equally

costly cash flow streams: annuity X and annuity Y. X is an annuity due with a cash
inflow of $9,000 for each of 6 years. Y is an ordinary annuity with a cash inflow of
$10,000 for each of 6 years. Assume that Ramesh can earn 15% on his
investments.
a. On a purely subjective basis, which annuity do you think is more attractive?
Why?
b. Find the future value at the end of year 6 for both annuities.
c. Use your finding in part b to indicate which annuity is more attractive. Why?
Compare your finding to your subjective response in part a.

14. You have a choice of accepting either

of two 5-year cash flow streams or single amounts. One cash flow stream is an
ordinary
annuity, and the other is a mixed stream. You may accept alternative A or B,
either as a cash flow stream or as a single amount. Given the cash flow stream and
single amounts associated with each (see the following table), and assuming a 9%
opportunity cost, which alternative (A or B) and in which form (cash flow stream
or single amount) would you prefer?

Cash flow stream

End of year Alternative A Alternative B
1 $700 $1,100
2 700 900
3 700 700
4 700 500
5 700 300
Single amount
At time zero $2,825 $2,800

15. Delia Martin has $10,000 that she can deposit in any of three savings accounts
for a 3-year period. Bank A compounds interest on an annual basis, bank B
compounds interest twice each year, and bank C compounds interest each quarter.
All three banks have a stated annual interest
rate of 4%.
a. What amount would Ms. Martin have at the end of the third year, leaving all
interest
paid on deposit, in each bank?
b. What effective annual rate (EAR) would she earn in each of the banks?
c. On the basis of your findings in parts a and b, which bank should Ms. Martin
deal with? Why?
d. If a fourth bank (bank D), also with a 4% stated interest rate, compounds interest
continuously, how much would Ms. Martin have at the end of the third year?
Does this alternative change your recommendation in part c? Explain why or
why not.