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Time Value of Money Problem Set

The document contains a problem set focused on the time value of money, including exercises on calculating nominal interest rates based on desired real returns and inflation rates, valuing a retail store with growing cash flows, and determining the future value of investments with varying interest rates. It also includes calculations for savings accounts with different interest rates over time and the present value of future cash flows. Each exercise provides specific answers for the calculations involved.

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4 views1 page

Time Value of Money Problem Set

The document contains a problem set focused on the time value of money, including exercises on calculating nominal interest rates based on desired real returns and inflation rates, valuing a retail store with growing cash flows, and determining the future value of investments with varying interest rates. It also includes calculations for savings accounts with different interest rates over time and the present value of future cash flows. Each exercise provides specific answers for the calculations involved.

Uploaded by

silviaazpiroz
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 PDF, TXT or read online on Scribd

Problem set 4.

The time value of money

Exercise 1. If investors want to obtain a real return (interest) of 3%, what is the nominal interest rate they
need to reach if inflation is a) zero, b) 4%, or c) 6%? (Ans.: a. 3%, b. 7.12%, c. 9.18%)

Exercise 2. You want to assess the value of a small retail store that is up for sale. The store generated a
cash flow of €100,000 at time zero and the future annual cash flows are expected to grow at a rate of 5% a
year in perpetuity.

a. If the discount rate is 10% annually, what is the value of the store? (Ans.: 2,200,000)
b. What growth rate would justify a price of €2,500,000? (Ans.: 5.6%)

Exercise 3. Today you can deposit $1,000 in a bank account. If the interest rate is 12% during the first year,
6% during the second year, and 3% during the third year, what is the value of the investment after three
years? (Ans.: 1,222.82)

Exercise 4. When you were born, your grandparents opened savings account for you and deposited $1,000.
During the first 8 years, the annual interest rates were 6% per year. Then, interest rates declined to 4% per
year. Now you are 21 years old and want to withdraw your money from the savings account.

a. How much money do you have? (Ans.: 2,653.87)


b. How much money do you have if your grandparents deposited $1,000 at the end of every year
since you were born until today? (Ans.: 33,106.84)

Exercise 5. Compute the total present value of receiving $100 in 2 months’ time and $325 in 8 months’
time if the interest rate is 0.25% per month. (Ans.: 418.07)

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