Time Value of Money Problems

1. You have an expected liability (cash outflow) of $500,000 in 10 years, and you use a
discount rate of 10%.

a. How much would you need to set aside at the end of each year for the next 10 years
to cover the expected liability? $31,373

b. How much would you need to set aside at the end of each year for the next 7 years
to cover the expected liability? $39,596

2. You have just taken a 30-year mortgage loan for $200,000. The annual percentage rate
on the loan is 8%, and payments will be made monthly.
a. Estimate your monthly payments. $1,467.53

b. Estimate your monthly payments if there is a balloon payment of $25,000 due at

3. You are planning to buy a car. Assuming monthly payments, how much would your
payments be:
a. the dealer offers to lend you $20,000 at a special financing rate of 3% for five
years Payment = $359.37

b. the dealer offers to lend you $20,000 at 6% for five years with no payments made
during the third year Payment = $482.89
4. A company is planning to set aside money to repay $100 million in bonds that will be
coming due in 10 years. If the appropriate discount rate is 9%,

a. how much money would the company need to set aside at the end of each year for
the next 10 years to be able to repay the bonds when they come due? $6.58MM

b. how would your answer change if the money were set aside at the beginning of each
year? $6.04MM

5. You are reviewing an advertisement by a finance company offering loans at an annual

6. You have a relative who has accumulated savings of $ 250,000 over his working lifetime
and now plans to retire.
a. Assuming that he wishes to withdraw equal installments from these savings for
the next 25 years of this life, how much will each installment amount to if he is
earning 5% on his savings? $17,738.11

b. Now assume he wishes to withdraw 2% more each year to account for inflation.
How much will the initial installment be? $14,548.29
7. You are offered a special set of annuities by your insurance company, whereby you will
receive $20,000 a year for the next 10 years and $30,000 a year for the following 10
years.
a. How much would you be willing to pay for these annuities, if your discount rate is
9% and the annuities are paid at the end of each year? $209,680

b. How much would you be willing to pay if they were at the beginning of each
year? $228,551

8. You are buying a house in Chatham, New Jersey. You have $100,000 to put as a down
payment, and 30-year mortgage rates are at 8%

Chatham
Price of the house $ 400,000
Monthly Property Tax $500

a. Estimate the total payments (mortgage and property taxes) Payment =

b. Now assume that Property Taxes will increase by 4% per year over the life of the
loan. What equal monthly payment could you make each month over the life of
the loan? Payment = $2,968.44
9. You have been hired to run a pension fund for TelDet Inc, a small manufacturing firm.
The firm currently has $5 million in the fund and expects to have cash inflows of $2
million a year for the first 5 years followed by cash outflows of $ 3 million a year for the
next 5 years. Assume that interest rates are at 8%.
a. How much money will be left in the fund at the end of the tenth year? $10.435 MM

b. If you were required to pay a perpetuity after the tenth year (starting in year 11 and
going through infinity) out of the balance left in the pension fund, how much could
you afford to pay? $834,780

10. You are an investment advisor who has been approached by a client for help on his
financial strategy. He has $250,000 in savings in the bank. He is 55 years old and
expects to work for 10 more years, making $100,000 a year. (He expects to make a
return of 5% on his investments for the foreseeable future. You can ignore taxes)
a. Once he retires 10 years from now, he would like to be able to withdraw $80,000 a
year for the following 25 years (his actuary tells him he will live to be ninety years
old.). How much would he need in the bank 10 years from now to be able to do this?
$1,127,520

b. How much of his income would he need to save each year for the next 10 years to
be able to afford these planned withdrawals ($80,000 a year) after the tenth year?
$57,267

c. How much of his income would he need to save each year for the next 4 years to be
able to afford these planned withdrawals ($80,000 a year) after the tenth year?
$124,705