1.

The following are exercises in future (terminal) values:

a. At the end of three years, how much is an initial deposit of $100 worth, assuming a compound annual interest
rate of (i) 100 percent? (ii) 10 percent? (iii) 0 percent?

b. At the end of five years, how much is an initial $500 deposit followed by five year-end, annual $100
payments worth, assuming a compound annual interest rate of (i) 10 percent? (ii) 5 percent? (iii) 0 percent? 3
The Time Value of Money

c. At the end of six years, how much is an initial $500 deposit followed by five year-end, annual $100 payments
worth, assuming a compound annual interest rate of (i) 10 percent? (ii) 5 percent? (iii) 0 percent?
d. At the end of three years, how much is an initial $100 deposit worth, assuming a quarterly compounded
annual interest rate of (i) 100 percent? (ii) 10 percent?

e. Why do your answers to Part (d) differ from those to Part (a)?

f. At the end of 10 years, how much is a $100 initial deposit worth, assuming an annual interest rate of 10
percent compounded (i) annually? (ii) semiannually? (iii) quarterly? (iv) continuously?
2. The following are exercises in present values:

a. $100 at the end of three years is worth how much today, assuming a discount rate of (i) 100 percent? (ii) 10
percent? (iii) 0 percent?

b. What is the aggregate present value of $500 received at the end of each of the next three years, assuming a
discount rate of (i) 4 percent? (ii) 25 percent?
c. $100 is received at the end of one year, $500 at the end of two years, and $1,000 at the end of three years.
What is the aggregate present value of these receipts, assuming a discount rate of (i) 4 percent? (ii) 25 percent?

d. $1,000 is to be received at the end of one year, $500 at the end of two years, and $100 at the end of three
years. What is the aggregate present value of these receipts assuming a discount rate of (i) 4 percent? (ii) 25
percent?

e. Compare your solutions in Part (c) with those in Part (d) and explain the reason for the differences.
3. Joe Hernandez has inherited $25,000 and wishes to purchase an annuity that will provide him with a steady
income over the next 12 years. He has heard that the local savings and loan association is currently paying 6
percent compound interest on an annual basis. If he were to deposit his funds, what year-end equal-dollar
amount (to the nearest dollar) would he be able to withdraw annually such that he would have a zero balance
after his last withdrawal 12 years from now?
4. You need to have $50,000 at the end of 10 years. To accumulate this sum, you have decided to save a certain
amount at the end of each of the next 10 years and deposit it in the bank. The bank pays 8 percent interest
compounded annually for long-term deposits. How much will you have to save each year (to the nearest dollar)?
5. Same as Problem 4 above, except that you deposit a certain amount at the beginning of each of the next 10
years. Now, how much will you have to save each year (to the nearest dollar)?
6. Vernal Equinox wishes to borrow $10,000 for three years. A group of individuals agrees to lend him this
amount if he contracts to pay them $16,000 at the end of the three years. What is the implicit compound annual
interest rate implied by this contract (to the nearest whole percent)?
[Link] of the P.J. Cramer Company were $500,000 this year, and they are expected to grow at a compound rate
of 20 percent for the next six years. What will be the sales figure at the end of each of the next six years?
8. The H & L Bark Company is considering the purchase of a debarking machine that is expected to provide
cash flows as follows:

Cash flow
1 2 3 4 5 6 7 8 9 10
$1,200 $2,000 $2,400 $1,900 $1,600 $1,400 $1,400 $1,400 $1,400 $1,400

If the appropriate annual discount rate is 14 percent, what is the present value of this cash-flow stream?
9. Suppose you were to receive $1,000 at the end of 10 years. If your opportunity rate is 10 percent, what is the
present value of this amount if interest is compounded (a) annually? (b) quarterly? (c) continuously?
10. In connection with the United States Bicentennial, the Treasury once contemplated offering a savings bond
for $1,000 that would be worth $1 million in 100 years. Approximately what compound annual interest rate is
implied by these terms?
11. The Happy Hang Glide Company is purchasing a building and has obtained a $190,000 mortgage loan for 20
years. The loan bears a compound annual interest rate of 17 percent and calls for equal annual installment
payments at the end of each of the 20 years. What is the amount of the annual payment?
12. Your late Uncle Vern’s will entitles you to receive $1,000 at the end of every other year for the next two
decades. The first cash flow is two years from now. At a 10 percent compound annual interest rate, what is the
present value of this unusual cash-flow pattern?
13. Emerson Cammack wishes to purchase an annuity contract that will pay him $7,000 a year for the rest of his
life. The Philo Life Insurance Company figures that his life expectancy is 20 years, based on its actuary tables.
The company imputes a compound annual interest rate of 6 percent in its annuity contracts.

a. How much will Cammack have to pay for the annuity?

b. How much would he have to pay if the interest rate were 8 percent?
14. The following cash-flow streams need to be analyzed:

CASH-
FLOW END OF YEAR
STREAM 1 2 3 4 5
W $100 $200 $200 $300 $1,300
X $600 - - - -
Y - - - - $11,200
Z $200 - $500 - $300

a. Calculate the future (terminal) value of each stream at the end of year 5 with a compound

annual interest rate of 10 percent.

b. Compute the present value of each stream if the discount rate is 14 percent.
15. Muffin Megabucks is considering two different savings plans. The first plan would have her deposit $500
every six months, and she would receive interest at a 7 percent annual rate, compounded semiannually. Under
the second plan she would deposit $1,000 every year with a rate of interest of 7.5 percent, compounded
annually. The initial deposit with Plan 1 would be made six months from now and, with Plan 2, one year hence.

a. What is the future (terminal) value of the first plan at the end of 10 years?

b. What is the future (terminal) value of the second plan at the end of 10 years?

c. Which plan should Muffin use, assuming that her only concern is with the value of her

savings at the end of 10 years?

d. Would your answer change if the rate of interest on the second plan were 7 percent?