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Week 1 Practice Problems

The document discusses various financial calculations including Future Value, Present Value, interest rates, and the time value of money. It provides examples of calculating future values for lump sums, discounting future values back to present values, and solving for unknown interest rates. Additionally, it includes practical scenarios involving college tuition, compensation for lost income, and business valuation.

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18 views12 pages

Week 1 Practice Problems

The document discusses various financial calculations including Future Value, Present Value, interest rates, and the time value of money. It provides examples of calculating future values for lump sums, discounting future values back to present values, and solving for unknown interest rates. Additionally, it includes practical scenarios involving college tuition, compensation for lost income, and business valuation.

Uploaded by

bazafali7
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Calculate the Future Value for each of the Present Value lump sums.

Present Value Years Interest rate Future value


12,535 14 14.50%
89,752 9 11%
76,355 14 18%
183,796 8 4%
20,000 5 10%
20,000 30 10%

Future Value Formula


Discount the future values back to their Present Values.

Present Value Years Interest rate Future value


15 7.00% 23,451
5 13% 92,517
31 14% 684,072
35 9% 790,122
5 9% 790,122
Solve for the unknown interest rate in each of the following:

Present Value Years Interest rate Future value


3,142 5 3,918
3,868 16 13,181
109,052 21 1,284,350
38,023 27 491,212
Rearrange to solve for I.

4.513%
7.964%
12.461%
9.940%
Solve the number of periods.

Present Value Time Interest rate Future value


560 14% 1,389
810 8% 1,821
18,400 7% 289,715
21,500 3% 430,258
Formula to solve for t.
t = ln(FV / PV) / ln(1 + r)
Calculating Interest Rates. The table below shows the median home sales
price in Q4 of 2000, 2019, and 2022.

1. What was the annual rate of increase from Q4 2000 to Q4 2019?


2. What was the annual rate of increase from Q4 2019 to Q4 2022?

Period Median Price


Q4, 2000 172900
Q4, 2019 358700
Q4, 2022 479500

Q4 2000 to Q4 2019
Present Value Time Interest rate Future value
172,900 19 358,700

Q4 2019 to Q4 2022
Present Value Time Interest rate Future value
358,700 3 479,500
an home sales
Rearrange to solve for I.

2019?
2022?
Calculating Future Values: The Louisiana Purchase encompassed 530,000,000 acres of territory in North A
the United States purchased from France in 1803 for $15 million. Assuming that money could have been i
an account earning 5% annual compound interest, what is the future value of the $15,000.

Present value Years Interest rate


15,000,000 220 6.846%

Check your work by solving for Present Value.


Present value Years Interest rate
220 6.846%

The historical average yearly return of the S&P 500 is 9.138% over the last 150 years, as of the end of June
2023. This assumes dividends are reinvested. Adjusted for inflation, the 150-year average stock market return
(including dividends) is 6.846%.
Source: https://tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages/#:~:text=The
%20historical%20average%20yearly%20return,including%20dividends)%20is%206.846%25.
ase encompassed 530,000,000 acres of territory in North America that
3 for $15 million. Assuming that money could have been invested in
st, what is the future value of the $15,000.

Future value
$0.00

Future value

500 is 9.138% over the last 150 years, as of the end of June
Adjusted for inflation, the 150-year average stock market return

-market-returns-for-sp-500-5-year-up-to-150-year-averages/#:~:text=The
20dividends)%20is%206.846%25.
Week 1 Practice Problems

Your second child will go to college 14 years from now. You currently make $100,000 per year, and your
salary will increase at the same rate as inflation, which is about 4% annually. Tuition is currently about
$60,000 a year, but growing by 5% yearly. In 14 years from now, what percentage of your salary would go to
pay for the first year of your child's college education?

A plane crashed and severly injured an artist named John. The plane company was found to be at fault of
negligence. John is injured and his music career is over. John is 50 years old and was expected to make $2.5
milliion dollars by the time he retired at the age of 72. In court the judge and jury agrees. Assuming an
annual inflation rate of 4.3%, what should John collect from the Plane company when the case is settled next
week?

Your startup will be worth $3 million in seven years from now. An investor wants to buy your company today
for $1.5 million. You feel this is a low offer. To know for sure you use some time value of money calculations
to discount the $3 million dollars in seven years, back to today using a 13% discount rate. Should you sell the
company now?

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