Topic 4 Tutorial
1. Time-value of money is based on the belief that it is better to receive money sooner than later because
the money that you have today can be invested to earn more money tomorrow. Hence, a dollar today is
worth more than a dollar in the future. [TRUE / FALSE]
Future Value
2. Calculate the compound interest on a loan of $1,000 at 8%, compounded annually for two years.
3. Everything else being equal, the higher the interest rate, the higher the future value. [TRUE / FALSE]
4. If you receive $100 today, calculate the future value if you deposit the amount at 6% for four years.
5. A couple purchased an apartment unit for $70,000. How much will their unit worth in 5 years if inflation is
expected to be 8%?
6. Find the future value at the end of year 3 of the following stream of cash flows received at the end of each
year, assuming the firm can earn 17% on its investments.
7. Jane received the following amounts of money at the end of each year from her parents. She deposited
her money in a saving account paying 6% rate of interest. How much money will Jane have at the end of 4
years?
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Present Value
8. Find the amount of money that should be invested (present value) at 2.5% compounded annually to yield
$1,500 in three years (future value).
9. Assuming an annual rate of return of 10%, how much is the present value of $200 to be received 10 years
from today?
10. Assuming an annual rate of return of 14%, calculate the present value of $89,000 to be received in 15
years.
11. You are considering the purchase of new equipment for your company and you have narrowed down the
possibilities to two models which perform equally well. However, the method of paying for the two
models is different.
a. Model A requires $5,000 per year payment for the next 5 years.
b. Model B requires the payment schedule as in the table.
Calculate the present value for each option. Which model should you buy if your opportunity cost is 8%?
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Annuity
12. Sue deposited $1,500 at the beginning of each year for three years at an annual interest rate of 9%. Find
the future value and total interest.
13. Johnathan plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000
at the end of each year for the next 20 years. If he can earn 12% on his contributions, how much will he
get at the end of the twentieth year?
14. Tom has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum
of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Tom choose if
his opportunity cost is 9 percent?
15. To pay for the college education, Joshua is saving $2,000 at the beginning of each year for the next eight
years in a bank account paying 12 percent interest. How much will he get in that account at the end of 8th
year?
Perpetuity
16. An annuity with an infinite life is called a(n)
A) perpetuity.
B) primia.
C) indefinite.
D) deep discount.
17. The present value of a $25,000 perpetuity at a 14% discount rate is _____________.
18. Sally has decided to set up an account that will pay her granddaughter $5,000 a year indefinitely. How
much should she deposit in an account paying 8% annual interest?
Compounding interest more frequent than annually
19. Calculate the future value of $6,490 received today and deposited for five years in an account which pays
interest of 14% compounded semiannually.
Nominal and effective annual rates of interest
20. The rate of interest actually paid or earned, also called the annual percentage rate, is the ______________
interest rate.