CHAPTER 5

The Time Value of Money

CHAPTER ORIENTATION
In this chapter the concept of a time value of money is introduced, that is, a dollar today is
worth more than a dollar received a year from now. Thus if we are to logically compare
projects and financial strategies, we must either move all dollar flows back to the present or
out to some common future date.

CHAPTER OUTLINE
I. Compound interest results when the interest paid on the investment during the first
period is added to the principal and during the second period the interest is earned on
the original principal plus the interest earned during the first period.
A. Mathematically, the future value of an investment if compounded annually at a
rate of i for n years will be
FVn = PV (l + i)n
where n = the number of years during which the compounding
occurs
i = the annual interest (or discount) rate
PV = the present value or original amount invested at the
beginning of the first period
FVn = the future value of the investment at the end of n
years
1. The future value of an investment can be increased by either increasing
the number of years we let it compound or by compounding it at a
higher rate.
2. If the compounded period is less than one year, the future value of an
investment can be determined as follows:
mn
FVn = PV
Where m = the number of times compounding occurs during the
year

90
II. Determining the present value, that is, the value in today's dollars of a sum of money
to be received in the future, involves nothing other than inverse compounding. The
differences in these techniques come about merely from the investor's point of view.
A. Mathematically, the present value of a sum of money to be received in the
future can be determined with the following equation:
PV = FVn
where: n = the number of years until payment will be received,
i = the opportunity rate or discount rate
PV = the present value of the future sum of money
FVn = the future value of the investment at the end of n
years
1. The present value of a future sum of money is inversely related to both
the number of years until the payment will be received and the
opportunity rate.
III. An annuity is a series of equal dollar payments for a specified number of years.
Because annuities occur frequently in finance, for example, bond interest payments,
we treat them specially.
A. A compound annuity involves depositing or investing an equal sum of money
at the end of each year for a certain number of years and allowing it to grow.
1. This can be done by using our compounding equation and
compounding each one of the individual deposits to the future or by
using the following compound annuity equation:
n 1
FVn = PMT (1 i) t
t 0
where: PMT = the annuity value deposited at the end of each
year
i = the annual interest (or discount) rate
n = the number of years for which the annuity will
last
FVn = the future value of the annuity at the end of the
nth year
B. Pension funds, insurance obligation, and interest received from bonds all
involve annuities. To compare these financial instruments we would like to
know the present value of each of these annuities.
1. This can be done by using our present value equation and discounting
each one of the individual cash flows back to the present or by using
the following present value of an annuity equation:
n 1
PV = PMT
t 1 (1 i) t
where: PMT = the annuity withdrawn at the end of each year

91
 i = the annual interest or discount rate
PV = the present value of the future annuity
n = the number of years for which the annuity will
last
C. This procedure of solving for PMT, the annuity value when i, n, and PV are
known, is also the procedure used to determine what payments are associated
with paying off a loan in equal installments. Loans paid off in this way, in
periodic payments, are called amortized loans. Here again we know three of
the four values in the annuity equation and are solving for a value of PMT, the
annual annuity.
IV. Annuities due are really just ordinary annuities where all the annuity payments have
been shifted forward by one year, compounding them and determining their present
value is actually quite simple. Because an annuity due merely shifts the payments
from the end of the year to the beginning of the year, we now compound the cash
flows for one additional year. Therefore, the compound sum of an annuity due is
FVn(annuity due) = PMT (FVIFAi,n) (1 + i)
A. Likewise, with the present value of an annuity due, we simply receive each
cash flow one year earlier that is, we receive it at the beginning of each year
rather than at the end of each year. Thus the present value of an annuity due is
PV(annuity due) = PMT (PVIFAi,n) (1 + i)
V. A perpetuity is an annuity that continues forever, that is every year from now on this
investment pays the same dollar amount.
A. An example of a perpetuity is preferred stock which yields a constant dollar
dividend infinitely.
B. The following equation can be used to determine the present value of a
perpetuity:
PV =
where: PV = the present value of the perpetuity
pp = the constant dollar amount provided by the perpetuity
i = the annual interest or discount rate
VI. To aid in the calculations of present and future values, tables are provided at the back
of Financial Management (FM).
A. To aid in determining the value of FVn in the compounding formula

FVn = PV (1 + i)n = PV (FVIFi,n)

tables have been compiled for values of FVIFi,n or (i + 1)n in Appendix B,

"Compound Sum of $1," in FM.

92
 B. To aid in the computation of present values
PV = FVn = FVn (PVIFi,n)

tables have been compiled for values of

or PVIFi,n
and appear in Appendix C in the back of FM.
C. Because of the time-consuming nature of compounding an annuity,
n 1
FVn = PMT
t 0
(1 i) t = PMT (FVIFAi,n)

Tables are provided in Appendix D of FM for

n 1

t 0
(1 i) t or FVIFAi,n

for various combinations of n and i.

D. To simplify the process of determining the present value of an annuity
n 1
PV = PMT = PMT (PVIFAi,n)
t 1 (1 i) t
tables are provided in Appendix E of FM for various combinations of n and i
for the value
n
1
(1 i) t
or PVIFAi,n
t 1

V. Spreadsheets and the Time Value of Money.

A. While there are several competing spreadsheets, the most popular one is
Microsoft Excel. Just as with the keystroke calculations on a financial
calculator, a spreadsheet can make easy work of most common financial
calculations. Listed below are some of the most common functions used with
Excel when moving money through time:
Calculation: Formula:
Present Value = PV(rate, number of periods, payment, future value, type)
Future Value = FV(rate, number of periods, payment, present value, type)
Payment = PMT(rate, number of periods, present value, future value,
type)
Number of Periods = NPER(rate, payment, present value, future value, type)
Interest Rate = RATE(number of periods, payment, present value, future
value, type, guess)

93
 where: rate = i, the interest rate or discount rate
number of periods = n, the number of years or periods
payment = PMT, the annuity payment deposited or received at the
end of each period
future value = FV, the future value of the investment at the end of n
periods or years
present value = PV, the present value of the future sum of money
type = when the payment is made, (0 if omitted)
0 = at end of period
1 = at beginning of period
guess = a starting point when calculating the interest rate, if
omitted, the calculations begin with a value of 0.1 or
10%

ANSWERS TO
END-OF-CHAPTER QUESTIONS

5-1. The concept of time value of money is a recognition that a dollar received today is
worth more than a dollar received a year from now or at any future date. It exists
because there are investment opportunities on money, that is, we can place our dollar
received today in a savings account and one year from now have more than a dollar.
5-2. Compounding and discounting are inverse processes of each other. In compounding,
money is moved forward in time, while in discounting money is moved back in time.
This can be shown mathematically in the
compounding equation:
FVn = PV (1 + i)n
We can derive the discounting equation by multiplying each side of
this equation by and we get:
PV = FVn
5-3. We know that
FVn = PV(1 + i)n
Thus, an increase in i will increase FVn and a decrease in n will
decrease FVn.
5-4. Bank C which compounds continuously pays the highest interest. This occurs
because, while all banks pay the same interest, 5 percent, bank C compounds the 5
percent continuously. Continuous compounding allows interest to be earned more
frequently than any other compounding period.
5-5. The values in the present value of an annuity table (Table 5-8) are actually derived
from the values in the present value table (Table 5-4). This can be seen by examining

94
 the value represented in each table. The present value table gives values of

for various values of i and n, while the present value of an annuity table gives values
of
n
1
(1 i) t
t 1

for various values of i and n. Thus the value in the present value of annuity for an n-
year annuity for any discount rate i is merely the sum of the first n value in the present
value table.
5-6. An annuity is a series of equal dollar payments for a specified number of years.
Examples of annuities include mortgage payments, interest payments on bonds, fixed
lease payments, and any fixed contractual payment. A perpetuity is an annuity that
continues forever, that is, every year from now on this investment pays the same
dollar amount. The difference between an annuity and a perpetuity is that a perpetuity
has no termination date whereas an annuity does.

SOLUTIONS TO
END-OF-CHAPTER PROBLEMS

Solutions to Problem Set A

5-1A. (a) FVn = PV (1 + i)n

FV10 = $5,000(1 + 0.10)10

FV10 = $5,000 (2.594)
FV10 = $12,970

(b) FVn = PV (1 + i)n

FV7 = $8,000 (1 + 0.08)7

FV7 = $8,000 (1.714)
FV7 = $13,712

(c) FV12 = PV (1 + i)n

FV12 = $775 (1 + 0.12)12
FV12 = $775 (3.896)
FV12 = $3,019.40

(d) FVn = PV (1 + i)n

95
 FV5 = $21,000 (1 + 0.05)5
FV5 = $21,000 (1.276)
FV5 = $26,796.00

5-2A. (a) FVn = PV (1 + i)n

$1,039.50 = $500 (1 + 0.05)n

2.079 = FVIF 5%, n yr.
Thus n = 15 years (because the value of 2.079 occurs in the 15
year row of the 5 percent column of Appendix B).
(b) FVn = PV (1 + i)n

$53.87 = $35 (1 + .09)n

1.539 = FVIF 9%, n yr.
Thus, n = 5 years
(c) FVn = PV (1 + i)n

$298.60 = $100 (1 + 0.2)n

2.986 = FVIF 20%, n yr.
Thus, n = 6 years
(d) FVn = PV (1 + i)n
$78.76 = $53 (1 + 0.02)n
1.486 = FVIF 2%, n yr.
Thus, n = 20 years
5-3A. (a) FVn = PV (1 + i)n

$1,948 = $500 (1 + i)12

3.896 = FVIF i%, 12 yr.
Thus, i = 12% (because the Appendix B value of 3.896 occurs in
the 12 year row in the 12 percent column)
(b) FVn = PV (1 + i)n

$422.10 = $300 (1 + i)7

1.407 = FVIF i%, 7 yr.
Thus, i = 5%

96
 (c) FVn = PV (1 + i)n

$280.20 = $50 ( 1 + i)20

5.604 = FVIF i%, 20 yr.
Thus, I = 9%
(d) FVn = PV ( 1 + i)n
$497.60 = $200 (1 + i)5
= FVIF i%, 5 yr.
Thus, i = 20%
5-4A. (a) PV = FVn
PV = $800
PV = $800 (0.386)
PV = $308.80
(b) PV = FVn
PV = $300
PV = $300 (0.784)
PV = $235.20
(c) PV = FVn

PV = $1,000
PV = $1,000 (0.789)
PV = $789

97
 (d) PV = FVn

PV = $1,000
PV = $1,000 (0.233)
PV = $233
n 1
5-5A. (a) FVn = PMT (1 i) t
t0
10 1 t
FV = $500 (1 0.05)
t 0
FV10 = $500 (12.578)
FV10 = $6,289
n 1
(b) FVn = PMT (1 i) t
t0
5 1
FV5 = $100 (1 0.1) t
t 0
FV5 = $100 (6.105)
FV5 = 610.50
n 1
(c) FVn = PMT (1 i) t
t0
7 1
FV7 = $35 (1 0.07) t
t 0
FV7 = $35 (8.654)
FV7 = $302.89
n 1
(d) FVn = PMT (1 i) t
t0
3 1
FV3 = $25 (1 0.02)t
t 0
FV3 = $25 (3.060)
FV3 = $76.50

98
 n 1
5-6A. (a) PV = PMT
t 1 (1 i) t

10 1
PV = $2,500
t 1 (1 0.07) t

PV = $2,500 (7.024)
PV = $17,560
n 1
(b) PV = PMT
t 1 (1 i) t

10
1
PV = $70
(1 0.03) t
t 1

PV = $70 (2.829)
PV = $198.03
n 1
(c) PV = PMT
t 1 (1 i) t

7 1
PV = $280
t 1 (1 0.06) t
PV = $280 (5.582)
PV = $1,562.96
n 1
(d) PV = PMT
t 1 (1 i) t

10 1
PV = $500
t 1 (1 0.1) t

PV = $500 (6.145)
PV = $3,072.50
5-7A. (a) FVn = PV (1 + i)n
compounded for 1 year
FV1 = $10,000 (1 + 0.06)1
FV1 = $10,000 (1.06)
FV1 = $10,600
compounded for 5 years

99
 FV5 = $10,000 (1 + 0.06)5
FV5 = $10,000 (1.338)
FV5 = $13,380
compounded for 15 years
FV15 = $10,000 (1 + 0.06)15
FV15 = $10,000 (2.397)
FV15 = $23,970

(b) FVn = PV (1 + i)n

compounded for 1 year at 8%
FV1 = $10,000 (1 + 0.08)1
FV1 = $10,000 (1.080)
FV1 = $10,800
compounded for 5 years at 8%
FV5 = $10,000 (1 + 0.08)5
FV5 = $10,000 (1.469)
FV5 = $14,690
compounded for 15 years at 8%
FV15 = $10,000 (1 + 0.08)15
FV15 = $10,000 (3.172)
FV15 = $31,720
compounded for 1 year at 10%
FV1 = $10,000 (1 + 0.1)1
FV1 = $10,000 (1 + 1.100)
FV1 = $11,000
compounded for 5 years at 10%
FV5 = $10,000 (1 + 0.1)5
FV5 = $10,000 (1.611)
FV5 = $16,110
compounded for 15 years at 10%

100
 FV15 = $10,000 (1 + 0.1)15
FV15 = $10,000 (4.177)
FV15 = $41,770
(c) There is a positive relationship between both the interest rate used to
compound a present sum and the number of years for which the compounding
continues and the future value of that sum.

5-8A. FVn = PV (1 + )mn

Account PV i m n (1 + )mn PV(1 + )mn
Theodore Logan III $ 1,000 10% 1 10 2.594 $ 2,594
Vernell Coles 95,000 12% 12 1 1.127 107,065
Thomas Elliott 8,000 12% 6 2 1.268 10,144
Wayne Robinson 120,000 8% 4 2 1.172 140,640
Eugene Chung 30,000 10% 2 4 1.477 44,310
Kelly Cravens 15,000 12% 3 3 1.423 21,345

5-9A. (a) FVn = PV (1 + i)n

FV5 = $5,000 (1 + 0.06)5
FV5 = $5,000 (1.338)
FV5 = $6,690
(b) FVn = PV (1 + )mn
2X5
FV5 = $5,000 (1 + )
FV5 = $5,000 (1 + 0.03)10
FV5 = $5,000 (1.344)
FV5 = $6,720
FVn = PV (1 + )mn
6X5
FV5 = 5,000 (1 + )
30
FV5 = $5,000 (1 + 0.01)
FV5 = $5,000 (1.348)
FV5 = $6,740
(c) FVn = PV (1 + i)n
FV5 5
= $5,000 (1 + 0.12)
FV5 = $5,000 (1.762)
FV5 = $8,810
mn
FV5 = PV
2X5
FV5 = $5,000
FV5 = $5,000 (1 + 0.06)10

101
 FV5 = $5,000 (1.791)
FV5 = $8,955
FV5 = PV mn
FV5 = $5,000 6X5
FV5 = $5,000 (1 + 0.02)30
FV5 = $5,000 (1.811)
FV5 = $9,055
(d) FVn = PV (1 + i)n
12
FV12 = $5,000 (1 + 0.06)
FV12 = 5,000 (2.012)
FV12 = $10,060
(e) An increase in the stated interest rate will increase the future value of a given
sum. Likewise, an increase in the length of the holding period will increase
the future value of a given sum.
n 1
5-10A. Annuity A: PV = PMT
t 1 (1 i) t

12 1
PV = $8,500
t 1 (1 0.11) t
PV = $8,500 (6.492)
PV = $55,182

Since the cost of this annuity is $50,000 and its present value is $55,182,
given an 11 percent opportunity cost, this annuity has value and should be
accepted.

102
 n 1
Annuity B: PV = PMT
t 1 (1 i)
t

25 1
PV = $7,000
t 1 (1 0.11)
t

PV = $7,000 (8.422)
PV = $58,952
Since the cost of this annuity is $60,000 and its present value is only $59,094,
given an 11 percent opportunity cost, this annuity should not be accepted.
n 1
Annuity C: PV = PMT
t
t 1 (1 i)
20 1
PV = $8,000 t


t 1 (1 0.11)
PV = $8,000 (7.963)
PV = $63,704
Since the cost of this annuity is $70,000 and its present value is only $63,704,
given an 11 percent opportunity cost, this annuity should not be accepted.
5-11A. Year 1: FVn = PV (1 + i)n

FV1 = 15,000(1 + 0.2)1

FV1 = 15,000(1.200)
FV1 = 18,000 books

Year 2: FVn = PV (1 + i)n

FV 2 = 15,000(1 + 0.2)2
FV 2 = 15,000(1.440)
FV2 = 21,600 books

Year 3: FVn = PV (1 + i)n

FV3 = 15,000(1.20)3
FV3 = 15,000(1.728)
FV3 = 25,920 books

103
 Book sales

25,000
20,000

15,000

years

1 2 3

The sales trend graph is not linear because this is a compound growth trend.
Just as compound interest occurs when interest paid on the investment during
the first period is added to the principal of the second period, interest is earned
on the new sum. Book sales growth was compounded; thus, the first year the
growth was 20 percent of 15,000 books, the second year 20 percent of 18,000
books, and the third year 20 percent of 21,600 books.

5-12A. FVn = PV (1 + i)n

FV1 = 41(1 + 0.10)1
FV1 = 41(1.10)
FV1 = 45.1 Home Runs in 1981 (in spite of the baseball strike).
FV2 = 41(1 + 0.10)2
FV2 = 41(1.21)
FV2 = 49.61 Home Runs in 1982
FV3 = 41(1 + 0.10)3
FV3 = 41(1.331)
FV3 = 54.571 Home Runs in 1983.
FV3 = 41(1 + 0.10)4
FV4 = 41(1.464)
FV4 = 60.024 Home Runs in 1984.
FV5 = 41(1 + 0.10)5
FV5 = 41(1.611)
FV5 = 66.051 Home Runs in 1985 (for a new major league record).

104
 n 1
5-13A. PV = PMT
t 1 (1 i) t

25
1
$60,000 = PMT
t 1 (1 0.09) t

$60,000 = PMT (9.823)

Thus, PMT = $6,108.11 per year for 25 years.
n 1
5-14A. FVn = PMT (1 i) t
t 0
15 1
$15,000 = PMT (1 0.06) t
t0
$15,000 = PMT (23.276)
Thus, PMT = $644.44
5-15A. FVn = PV (1 + i)n
$1,079.50 = $500 (FVIF i%, 10 yr.)
2.159 = FVIF i%, 10 yr.
Thus, i = 8%
5-16A. The value of the home in 10 years
FV10 = PV (1 + .05)10
= $100,000(1.629)
= $162,900
How much must be invested annually to accumulate $162,900?
10 1
$162,900 = PMT (1 .10) t
t0
$162,900 = PMT(15.937)
PMT = $10,221.50
n 1
5-17A. FVn = PMT (1 i) t
t 0
10 1
$10,000,000 = PMT (1 .09) t
t 0

105
 $10,000,000 = PMT(15.193)
Thus, PMT = $658,197.85
5-18A. One dollar at 12.0% compounded monthly for one year
FVn = PV nm

FV12 = $1(1 + .01)12

= $1(1.127)
= $1.127
One dollar at 13.0% compounded annually for one year
FVn = PV (1 + i)n

FV1 = $1(1 + .13)1

= $1(1.13)
= $1.13
The loan at 12% compounded monthly is more attractive.
5-19A. Investment A
n i
PV = PMT
t 1 (1 i) t

5 1
= $10,000
t 1 (1 .20) t
= $10,000(2.991)
= $29,910
Investment B
First, discount the annuity back to the beginning of year 5, which is the end of
year 4, Then discount this equivalent sum to present.
n 1
PV = PMT
t 1 (1 i)
t

6 1
= $10,000
t 1 (1 .20) t

= $10,000(3.326)
= $33,260--then discount the equivalent sum back to present.
PV = FVn
= $33,260
= $33,260(.482)

106
 = $16,031.32
Investment C
PV = FVn
= $10,000 + $50,000
+ $10,000
= $10,000(.833) + $50,000(.335) + $10,000(.162)
= $8,330 + $16,750 + $1,620
= $26,700
5-20A. PV = FVn
PV = $1,000
PV = $1,000(.513)
PV = $513
5-21A. (a) PV =
PV =
PV = $3,750
(b) PV =
PV =
PV = $8,333.33
(c) PV =
PV =
PV = $1,111.11
(d) PV =
PV =
PV = $1,900
5-22A. PV(annuity due) = PMT(PVIFAi,n)(l+i)
= $1,000(6.145)(1+.10)
= $6145(1.10)
= $6759.50
.
5-23A. FVn = PV (1 + )m n
.
4 = 1(1 + )2 n
.
4 = (1 + 0.08)2 n
4 = FVIF 8%, 2n yr.

107
 A value of 3.996 occurs in the 8 percent column and 18-year row of the table in
Appendix B. Therefore, 2n = 18 years and n = approximately 9 years.
5-24A. Investment A:
PV = FVn (PVIFi,n)
PV = $2,000(PVIF10%, year 1) + $3,000(PVIF10%, year 2) +
$4,000(PVIF10%, year 3) - $5,000(PVIF10%, year 4) +
$5,000(PVIF10%, year 5)
= $2,000(.909) + $3,000(.826) + $4,000(.751) - $5,000(.683)
+ $5,000(.621)
= $1,818 + $2,478 + $3,004 - $3,415 + $3,105
= $6,990.
Investment B:
PV = FVn (PVIFi,n)
PV = $2,000(PVIF10%, year 1) + $2,000(PVIF10%, year 2) +
$2,000(PVIF10%, year 3) + $2,000(PVIF10%, year 4) +
$5,000(PVIF10%, year 5)
= $2,000(.909) + $2,000(.826) + $2,000(.751) + $2,000(.683)
+ $5,000(.621)
= $1,818 + $1,652 + $1,502 + $1,366 + $3,105
= $9,443.
Investment C:
PV = FVn (PVIFi,n)
PV = $5,000(PVIF10%, year 1) + $5,000(PVIF10%, year 2) -
$5,000(PVIF10%, year 3) - $5,000(PVIF10%, year 4) +
$15,000(PVIF10%, year 5)
= $5,000(.909) + $5,000(.826) - $5,000(.751) - $5,000(.683) +
$15,000(.621)
= $4,545 + $4,130 - $3,755 - $3,415 + $9,315
= $10,820.

5-25A. The Present value of the $10,000 annuity over years 11-15.
15 1 10 1
PV = PMT
t 1 (1 .06)t t 1 (1 .06)t

= $10,000(9.712 - 7.360)
= $10,000(2.352)

108
 = $23,520
The present value of the $20,000 withdrawal at the end of year 15:
PV = FV15
= $20,000(.417)
= $8,340
Thus, you would have to deposit $23,520 + $8,340 or $31,860 today.
10 1
5-26A. PV = PMT
t 1 (1 .10) t

$40,000 = PMT (6.145)

PMT = $6,509
5 1
5-27A. PV = PMT
t 1 (1 i)
t

$30,000 = $10,000 (PVIFAi%, 5 yr.)

3.0 = PVIFAi%, 5 yr.
i = 20%
5-28A. PV = FVn
$10,000 = $27,027 (PVIFi%, 5 yr.)
.370 = PVIF22%, 5 yr.
Thus, i = 22%
n 1
5-29A. PV = PMT t
t 1 (1 i)
5 1
$25,000 = PMT
t
t 1 (1 .12)
$25,000 = PMT (3.605)
PMT = $6,934.81
5-30A. The present value of $10,000 in 12 years at 11 percent is:
PV = FVn ()
PV = $10,000 ()
PV = $10,000 (.286)
PV = $2,860
The present value of $25,000 in 25 years at 11 percent is:
PV = $25,000 ()

109
 = $25,000 (.074)
= $1,850
Thus take the $10,000 in 12 years.
n 1
5-31A. FVn = PMT (1 i) t
t0
5 1
$20,000 = PMT (1 .12) t
t 0
$20,000 = PMT(6.353)
PMT = $3,148.12

110
5-32A.
n 1
(a) FV = (1 i) t

t0
15 1
$50,000 = (1 .07) t

t 0
$50,000 = PMT (FVIFA7%, 15 yr.)
$50,000 = PMT(25.129)
A = $1,989.73. per year
(b) PV = FVn
PV = $50,000 (PVIF7%, 15 yr.)
PV = $50,000(.362)
PV = $18,100 deposited today
(c) The contribution of the $10,000 deposit toward the $50,000 goal is
FVn = PV(1 + i)n
FVn = $10,000 (FVIF7%, 10 yr.)
FV10 = $10,000(1.967)
= $19,670
Thus only $30,330 need be accumulated by annual deposit.
n 1 t
FV = PMT (1 i)
t0
$30,330 = PMT (FVIFA7%, 15 yr.)
$30,330 = PMT [25.129]
PMT = $1,206.97 per year
5-33A. (a) This problem can be subdivided into (1) the compound value of the $100,000
in the savings account (2) the compound value of the $300,000 in stocks, (3)
the additional savings due to depositing $10,000 per year in the savings
account for 10 years, and (4) the additional saving due to depositing $10,000
per year in the savings account at the end of years 6-10. (Note the $20,000
deposited in years 6-10 is covered in parts (3) and (4).)
(1) Future value of $100,000
FV10 = $100,000 (1 + .07)10
FV10 = $100,000 (1.967)

111
 FV10 = $196,700
(2) Future value of $300,000
FV10 = $300,000 (1 + .12)10
FV10 = $300,000 (3.106)
FV10 = $931,800
(3) Compound annuity of $10,000, 10 years
n 1
FV10 = PMT (1 i) t
t0

10 1
= $10,000 (1 .07) t
t 0
= $10,000 (13.816)
= $138,160
5 1
(4) Compound annuity of $10,000 (years 6 (1 .07) t - 10)
t 0
FV5 = $10,000
= $10,000 (5.751)
= $57,510

At the end of ten years you will have $196,700 + $931,800 + $138,160 + $57,510 =
$1,324,170.
20 1
(b) PV = PMT
t 1 (1 .10)
t

$1,324,170 = PMT (8.514)

PMT = $155,528
5-34A. PV = PMT (PVIFAi%, n yr.)
$100,000 = PMT (PVIFA15%, 20 yr.)
$100,000 = PMT(6.259)
PMT = $15,977
5-35A. PV = PMT (PVIFAi%, n yr.)
$150,000 = PMT (PVIFA10%, 30 yr.)
$150,000 = PMT(9.427)
PMT = $15,912

112
5-36A. At 10%:
PV = $50,000 + $50,000 (PVIFA10%, 19 yr.)
PV = $50,000 + $50,000 (8.365)
PV = $50,000 + $418,250
PV = $468,250
At 20%:
PV = $50,000 + $50,000 (PVIFA20%, 19 yr.)
PV = $50,000 + $50,000 (4.843)
PV = $50,000 + $242,150
PV = $292,150
5-37A. FVn(annuity due) = PMT(FVIFAi,n)(l+i)
= $1000(FVIFA10%,10 years)(1+.10)
= $1000(15.937)(1.1)
= $17,530.70
FVn(annuity due) = PMT(FVIFAi,n)(l+i)
= $1,000(FVIFA15%,10 years)(1+.15)
= $1,000(20.304)(1.15)
= $23,349.60
5-38A. PVn(annuity due) = PMT(PVIFAi,n)(l+i)
= $1,000(PVIFA10%,10 years)(1+.10)
= $1,000(6.145)(1.10)
= $6,759.50
PVn(annuity due) = PMT(PVIFAi,n)(l+i)
= $1,000(PVIFA15%,10 years)(l+.15)
= $1,000(5.019)(1.15)
= $5,771.85
5-39A. PV = PMT(PVIFAi,n)(PVIFi,n)
= PMT(PVIFA10%,10 years)(PVIF10%,7 years)
= $1,000(6.145)(.513)
= $3,152.39

113
5-40A. FV = PV (FVIFi%, n yr.)
$6,500 = .12(FVIFi%, 37 yr.)
solving using a financial calculator:
i = 34.2575%

5-41A. (a)

1/02 1/07 1/12 1/17 1/22 1/27

$50,000

$50,000 per year $250,000 $100,000

There are a number of equivalent ways to discount these cash flows back to present,
one of which is as follows (in equation form):

PV = $50,000(PVIFA10%, 19 yr. - PVIFA10%, 4 yr.)

+ $250,000(PVIF10%, 20 yr.)
+ $50,000(PVIF10%, 23 yr. + PVIF10%, 24 yr.)
+ $100,000 (PVIF10%, 25 yr.)
= $50,000 (8.365-3.170) + $250,000 (.149)
+ $50,000 (0.112 + .102) + $100,000 (.092)
= $259,750 + $37,250 + $10,700 + $9,200
= $316,900

(b) If you live longer than expected you could end up with no money later on in life.

114
5-42A.

rate (i) = 8%
number of periods (n) = 7
payment (PMT) = $0
present value (PV) = $900
type (0 = at end of period) = 0

Future value = $1,542.44

Excel formula: =FV(rate,number of periods,payment,present value,type)

Notice that present value ($500) took on a negative value.

5-43A.

In 20 years you'd like to have $250,000 to buy a home, but you only have $30,000.
At what rate must your $30,000 be compounded annually for it to grow to $250,000
in 20 years?

number of periods (n) = 20

payment (PMT) = $0
present value (PV) = $30,000
future value (FV) = $250,000
type (0 = at end of period) = 0
guess =

i = 11.18%

Excel formula: =RATE(number of periods,payment,present value,future

value,type,guess)

Notice that present value ($30,000) took on a negative value.

115
5-44A.

To buy a new house you take out a 25 year mortgage for $300,000. What will your
monthly interest rate payments be if the interest rate on your mortgage is 8 percent?

Two things to keep in mind when you're working this problem: first, you'll have to
convert the annual rate of 8 percent into a monthly rate by dividing it by 12, and
second, you'll have to convert the number of periods into months by multiplying 25
times 12 for a total of 300 months.

Excel formula: = PMT(rate,number of periods,present value,future value,type)

rate (i) = 8%/12

number of periods (n) = 300
present value (PV) = $300,000
future value (FV) = $0
type (0 = at end of period) = 0

monthly mortgage payment = ($2,315.45)

Notice that monthly payments take on a negative value because you pay them.

You can also use Excel to calculate the interest and principal portion of any loan
amortization payment. You can do this using the following Excel functions:

Calculation: Formula:

Interest portion of payment = IPMT(rate,period,number of

periods,present value,future value,type)

Principal portion of payment = PPMT(rate,period,number of

periods,present value,future value,type)

where period refers to the number of an individual periodic payment.

Thus, if you would like to determine how much of the 48th monthly payment went
toward interest and principle you would solve as follows:

Interest portion of payment 48: ($1,884.37)

The principle portion of payment 48: ($431.08)

116
Solution to Integrative Problem

1. Discounting is the inverse of compounding. We really only have one formula to move
a single cash flow through time. In some instances we are interested in bringing that
cash flow back to the present (finding its present value) when we already know the
future value. In other cases we are merely solving for the future value where we
know the present value.
2. The values in the present value of an annuity table (Table 5-8) are actually derived
from the values in the present value table (Table 5-4). This can be seen by examining
the value represented in each table. The present value table gives values of

for various values of i and n, while the present value of an annuity table gives values
of

n 1

t 1 (1 i) t

for various values of i and n. Thus the value in the present value of annuity for an n-
year annuity for any discount rate i is merely the sum of the first n value in the present
value table.

3. (1) FVn = PV (1 + i)n

FV11 = $5,000(1 + 0.08)10

FV11 = $5,000 (2.159)
FV11 = $10,795

(2) FVn = PV (1 + i)n

$1,671 = $400 (1 + 0.10)n

4.1775 = FVIF 10%, n yr.
Thus n= 15 years (because the value of 4.177 occurs in the 15 year row of
the 10 percent column of Appendix B).
(3) FVn = PV (1 + i)n

$4,046 = $1,000 (1 + i)10

4.046 = FVIF i%, 10 yr.
Thus, i = 15% (because the Appendix B value of 4.046 occurs in the 10
year row in the 15 percent column)

117
 mn
4. FVn = PV
25
= $1,000
10
= $1,000(1+.05)
= $1,629

5. An annuity due is an annuity in which the payments occur at the beginning of each
period as opposed to occurring at the end of each period, which is when the payment
occurs in an ordinary annuity.

6. PV = PMT(PVIFAi,n)
= $1,000(PVIFA10%,7 years)
= $1,000(4.868)
= $4,868
PV(annuity due) = PMT(PVIFAi,n)(l+i)
= $1000(4.868)(l+.10)
= $5,354.80
7. FV = PMT(FVIFAi,n)
= $1,000(9.487)
= $9,487
FVn(annuity due) = PMT(FVIFAi,n)(l+i)
= $1000(9.487)(l+.10)
= $10,435.70
8. PV = PMT(PVIFAi,n)
$100,000 = PMT(PVIFA10%, 25 years)
$100,000 = PMT(9.077)
$11,016.86 = PMT
9. PV =
=
= $12,500

118
10. PV = PMT(PVIFAi,n)(PVIFi,n)
= $1,000(PVIFA10%,10 years)(PVIF10%, 9 years)
= $1,000(6.145)(.424)
= $2,605.48
11. PV =
= PVIF10%, 9 years)
=
= $4,240.00
m
12. APY = -1
4
= -1
4
= [1 + .02] - 1
= 1.0824 - 1
= .0824 or 8.24%

Solutions to Problem Set B

5-1B.
(a) FVn = PV (1 + i)n

FV11 = $4,000(1 + 0.09)11

FV11 = $4,000 (2.580)
FV11 = $10,320

(b) FVn = PV (1 + i)n

FV10 = $8,000 (1 + 0.08)10

FV10 = $8,000 (2.159)
FV10 = $17,272

119
 (c) FVn = PV (1 + i)n
FV12 = $800 (1 + 0.12)12
FV12 = $800 (3.896)
FV12 = $3,117

(d) FVn = PV (1 + i)n

FV6 = $21,000 (1 + 0.05)6

FV6 = $21,000 (1.340)
FV6 = $28,140
5-2B.
(a) FVn = PV (1 + i)n

$1,043.90 = $550 (1 + 0.06)n

1.898 = FVIF6%, n yr.
Thus n = 11 years (because the value of 1.898 occurs in the 11 year
row of the 6 percent column of Appendix B).
(b) FVn = PV (1 + i)n

$88.44 = $40 (1 + .12)n

2.211 = FVIF12%, n yr.
Thus, n = 7 years
(c) FVn = PV (1 + i)n

$614.79 = $110 (1 + 0.24)n

5.589 = FVIF24%, n yr.
Thus, n = 8 years
(d) FVn = PV (1 + i)n
$78.30 = $60 (1 + 0.03)n
1.305 = FVIF3%, n yr.
Thus, n = 9 years

120
5-3B. (a) FVn = PV (1 + i)n

$1,898.60 = $550 (1 + i)13

3.452 = FVIFi%, 13 yr.
Thus, i = 10% (because the Appendix B value of 3.452 occurs in
the 12 year row in the 10 percent column)
(b) FVn = PV (1 + i)n

$406.18 = $275 (1 + i)8

1.477 = FVIFi%, 8 yr.
Thus, i = 5%
(c) FVn = PV (1 + i)n

$279.66 = $60 ( 1 + i)20

4.661 = FVIFi%, 20 yr.
Thus, i = 8%
(d) FVn = PV ( 1 + i)n
$486.00 = $180 (1 + i)6
2.700 = FVIFi%, 6 yr.
Thus, i = 18%
5-4B.
(a) PV = FVn
PV = $800
PV = $800 (0.386)
PV = $308.80
(b) PV = FVn
PV = $400
PV = $400 (0.705)
PV = $282.00

121
 (c) PV = FVn

PV = $1,000
PV = $1,000 (0.677)
PV = $677
(d) PV = FVn

PV = $900
PV = $900 (0.194)
PV = $174.60
5-5B.
n 1
(a) FVn = PMT (1 i) t
t0
10 1 t
FV = $500 (1 0.06)
t0
FV10 = $500 (13.181)
FV10 = $6,590.50

n 1
(b) FVn = PMT (1 i) t
t0
5 1
FV5 = $150 (1 0.11) t
t 0
FV5 = $150 (6.228)
FV5 = $934.20

n 1
(c) FVn = PMT (1 i) t
t0
8 1
FV7 = $35 (1 0.07) t
t 0
FV7 = $35 (10.260)
FV7 = $359.10

122
 n 1
(d) FVn = PMT (1 i) t
t0
3 1
FV3 = $25 (1 0.02) t
t0
FV3 = $25 (3.060)
FV3 = $76.50
5-6B.
n 1
(a) PV = PMT
t
t 1 (1 i)

10 1
PV = $3,000
t 1 (1 0.08) t

PV = $3,000 (6.710)
PV = $20,130
n 1
(b) PV = PMT
t 1 (1 i) t

3 1
PV = $50
t 1 (1 0.03) t
PV = $50 (2.829)
PV = $141.45
n 1
(c) PV = PMT
t 1 (1 i) t

8 1
PV = $280
t 1 (1 0.07) t
PV = $280 (5.971)
PV = $1,671.88
n 1
(d) PV = PMT
t 1 (1 i) t

10 1
PV = $600
t 1 (1 0.1) t

PV = $600 (6.145)
PV = $3,687.00
5-7B.

123
(a) FVn = PV (1 + i)n
compounded for 1 year
FV1 = $20,000 (1 + 0.07)1
FV1 = $20,000 (1.07)
FV1 = $21,400
compounded for 5 years
FV5 = $20,000 (1 + 0.07)5
FV5 = $20,000 (1.403)
FV5 = $28,060
compounded for 15 years
FV15 = $20,000 (1 + 0.07)15
FV15 = $20,000 (2.759)
FV15 = $55,180

(b) FVn = PV (1 + i)n

compounded for 1 year at 9%
FV1 = $20,000 (1 + 0.09)1
FV1 = $20,000 (1.090)
FV1 = $21,800
compounded for 5 years at 9%
FV5 = $20,000 (1 + 0.09)5
FV5 = $20,000 (1.539)
FV5 = $30,780
compounded for 15 years at 9%
FV15 = $20,000 (1 + 0.09)15
FV15 = $20,000 (3.642)
FV15 = $72,840
compounded for 1 year at 11%
FV1 = $20,000 (1 + 0.11)1
FV1 = $20,000 (1.11)
FV1 = $22,200

124
 compounded for 5 years at 11%
FV5 = $20,000 (1 + 0.11)5
FV5 = $20,000 (1.685)
FV5 = $33,700
compounded for 15 years at 11%
FV15 = $20,000 (1 + 0.11)15
FV15 = $20,000 (4.785)
FV15 = $95,700
(c) There is a positive relationship between both the interest rate used to
compound a present sum and the number of years for which the compounding
continues and the future value of that sum.

5-8B. FVn = PV (1 + )mn

Account PV i m n (1 + )mn PV(1 + )mn
Korey Stringer 2,000 12% 6 2 1.268 $2,536
Eric Moss 50,000 12% 12 1 1.127 56,350
Ty Howard 7,000 18% 6 2 1.426 9,982
Rob Kelly 130,000 12% 4 2 1.267 164,710
Matt Christopher 20,000 14% 2 4 1.718 34,360
Juan Porter 15,000 15% 3 3 1.551 23,265

5-9B.
(a) FVn = PV (1 + i)n

FV5 = $6,000 (1 + 0.06)5

FV5 = $6,000 (1.338)
FV5 = $8,028

(b) FVn = PV (1 + )mn

FV5 = $6,000 (1 + )2 x 5
FV5 = $6,000 (1 + 0.03)10
FV5 = $6,000 (1.344)
FV5 = $8,064

FVn = PV (1 + )mn
6X5
FV5 = $6,000 (1 + )

125
 FV5 = $6,000 (1 + 0.01)30
FV5 = $6,000 (1.348)
FV5 = $8,088

(c) FVn = PV (1 + i)n

FV5 = $6,000 (1 + 0.12)5
FV5 = $6,000 (1.762)
FV5 = $10,572
mn
FV5 = PV
2X5
FV5 = $6,000

FV5 = $6,000 (1 + 0.06)10

FV5 = 6,000 (1.791)
FV5 = $10,746

FV5 = PV mn
6X5
FV5 = $6,000

FV5 = $6,000 (1 + 0.02)30

FV5 = $6,000 (1.811)
FV5 = $10,866

(d) FVn = PV (1 + i)n

12
FV12 = $6,000 (1 + 0.06)
FV12 = $6,000 (2.012)
FV12 = $12,072

126
 (e) An increase in the stated interest rate will increase the future value of a given
sum. Likewise, an increase in the length of the holding period will increase
the future value of a given sum.
n 1
5-10B. Annuity A: PV = PMT
t 1 (1 i) t

12 1
PV = $8,500
t 1 (1 0.12) t
PV = $8,500 (6.194)
PV = $52,649
Since the cost of this annuity is $50,000 and its present value is $52,649, given a 12
percent opportunity cost, this annuity has value and should be accepted.

n 1
Annuity B: PV = PMT
t 1 (1 i) t

25 1
PV = $7,000
t 1 (1 0.12) t
PV = $7,000 (7.843)
PV =$54,901
Since the cost of this annuity is $60,000 and its present value is only $54,901 given a
12 percent opportunity cost, this annuity should not be accepted.
n 1
Annuity C: PV = PMT
t 1 (1 i) t

20 1
PV = $8,000
t 1 (1 0.12) t
PV = $8,000 (7.469)
PV = $59,752
Since the cost of this annuity is $70,000 and its present value is only $59,752,
given a 12 percent opportunity cost, this annuity should not be accepted.
5-11B. Year 1: FVn = PV (1 + i)n

FV1 = 10,000(1 + 0.15)1

FV1 = 10,000(1.15)
FV1 = 11,500 books

127
 Year 2: FVn = PV (1 + i)n

FV 2 = 10,000(1 + 0.15)2
FV 2 = 10,000(1.322)
FV2 = 13,220 books

Year 3: FVn = PV (1 + i)n

FV3 = 10,000(1 + 0.15)3

FV3 = 10,000(1.521)
FV3 = 15,210 books

Book sales

20,000

15,000

10,000

years
1 2 3

The sales trend graph is not linear because this is a compound growth trend.
Just as compound interest occurs when interest paid on the investment during
the first period is added to the principal of the second period, interest is earned
on the new sum. Book sales growth was compounded; thus, the first year the
growth was 15 percent of 10,000 books, the second year 15 percent of 11,500
books, and the third year 15 percent of 13,220 books.

5-12B. FVn = PV (1 + i)n

FV1 = 41(1 + 0.12)1

FV1 = 41(1.12)

128
 FV1 = 45.92 Home Runs in 1981 (in spite of the baseball strike).

FV2 = 41(1 + 0.12)2

FV2 = 41(1.254)
FV2 = 51.414 Home Runs in 1982

FV3 = 41(1 + 0.12)3

FV3 = 41(1.405)
FV3 = 57.605 Home Runs in 1983.

FV3 = 41(1 + 0.12)4

FV4 = 41(1.574)
FV4 = 64.534 Home Runs in 1984 (for a new major league
record).
FV5 = 41(1 + 0.12)5
FV5 = 41(1.762)
FV5 = 72.242 Home Runs in 1985 (again for a new major league
record).

Actually, Reggie never hit more than 41 home runs in a year. In 1982, he only hit 15,
in1983 he hit 39, in 1984 he hit 14, in 1985 25 and 26 in 1986. He retired at the end of
1987 with 563 career home runs.
n 1
5-13B. PV = PMT
t 1 (1 i) t

25 1
$120,000 = PMT
t 1 (1 0.1)
t

$120,000 = PMT(9.077)
Thus, PMT = $13,220.23 per year for 25 years
n 1
5-14B. FVn = PMT (1 i) t
t0
15 1 t
$25,000 = PMT (1 0.07)
t0
$25,000 = PMT(25.129)
Thus, PMT = $994.87

129
5-15B. FVn = PV (1 + i)n
$2,376.50 = $700 (FVIFi%, 10 yr.)
3.395 = FVIFi%, 10 yr.
Thus, i = 13%
5-16B. The value of the home in 10 years
FV10 = PV (1 + .05)10
= $125,000(1.629)
= $203,625
How much must be invested annually to accumulate $203.625?
10 1 t
$203,625 = PMT (1 .10)
t0
$203,625 = PMT(15.937)
PMT = $12,776.87
n 1
5-17B. FVn = PMT (1 i) t
t0
10 1 t
$15,000,000 = PMT (1 .10)
t0
$15,000,000 = PMT(15.937)
Thus, PMT = $941,206
5-18B. One dollar at 24.0% compounded monthly for one year
FVn = PV (1 + )nm

FV12 = $1(1 + .02)12

= $1(1.268)
= $1.268
One dollar at 26.0% compounded annually for one year
FVn = PV (1 + i)n

FV1 = $1(1 + .26)1

= $1(1.26)
= $1.26
The loan at 26% compounded annual is more attractive.

130
5-19B. Investment A
n i
PV = PMT
t 1 (1 i) t

5 1
= $15,000
t 1 (1 .20) t
= $15,000(2.991)
= $44,865
Investment B
First, discount the annuity back to the beginning of year 5, which is the end of year 4.
Then discount this equivalent sum to present.
n 1
PV = PMT
t 1 (1 i)
t

6 1
= $15,000
t 1 (1 .20) t

= $15,000(3.326)
= $49,890--then discount the equivalent sum back to present.
PV = FVn
= $49,890
= $49,890(.482)
= $24,046.98
Investment C
PV = FVn
= $20,000 + $60,000
+ $20,000
= $20,000(.833) + $60,000(.335) + $20,000(.162)
= $16,660 + $20,100 + $3,240
= $40,000

131
5-20B. PV = FVn
PV = $1,000
= $1,000(.502)
= $502
5-21B. (a) PV =
PV =
PV = $4,444
(b) PV =
PV =
PV = $11,538
(c) PV =
PV =
PV = $1,500
(d) PV =
PV =
PV = $1,667
5-22B. PV(annuity due) = PMT(PVIFAi,n)(l + i)
= $1000(3.791)(1 + .10)
= $3791(1.1)
= $4,170.10
.
5-23B. FVn = PV (1 + )m n
. n
7 = 1(1 + )2

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 . n
7 = (1 + 0.05)2
7 = FVIF5%, 2n yr.
A value of 7.040 occurs in the 5 percent column and 40-year row of the table in
Appendix B. Therefore, 2n = 40 years and n = approximately 20 years.
5-24A. Investment A:
PV = FVn (PVIFi,n)
PV = $5,000(PVIF10%, year 1) + $5,000(PVIF10%, year 2) +
$5,000(PVIF10%, year 3) - $15,000(PVIF10%, year 4) +
$15,000(PVIF10%, year 5)
= $5,000(.909) + $5,000(.826) + $5,000(.751) - $15,000(.683)
+ $15,000(.621)
= $4,545 + $4,130 + $3,755 - $10,245 + $9,315
= $11,500.
Investment B:
PV = FVn (PVIFi,n)
PV = $1,000(PVIF10%, year 1) + $3,000(PVIF10%, year 2) +
$5,000(PVIF10%, year 3) + $10,000(PVIF10%, year 4) -
$10,000(PVIF10%, year 5)
= $1,000(.909) + $3,000(.826) + $5,000(.751) +
$10,000(.683) - $10,000(.621)
= $909 + $2,478 + $3,755 + $6,830 - $6,210
= $7,762.
Investment C:
PV = FVn (PVIFi,n)
PV = $10,000(PVIF10%, year 1) + $10,000(PVIF10%, year 2) +
$10,000(PVIF10%, year 3) + $10,000(PVIF10%, year 4) -
$40,000(PVIF10%, year 5)
= $10,000(.909) + $10,000(.826) + $10,000(.751) +
$10,000(.683) - $40,000(.621)
= $9,090 + $8,260 + $7,510 + $6,830 - $24,840
= $6,850.

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5-25B.
The Present value of the $10,000 annuity over years 11-15.
15 1 10 1
PV = PMT
t 1 (1 .07)t t 1 (1 .07)t
= $10,000(9.108 - 7.024)
= $10,000(2.084)
= $20,840
The present value of the $15,000 withdrawal at the end of year 15:
PV = FV15
= $15,000(.362)
= $5,430
Thus, you would have to deposit $20,840 + $5,430 or $26,270 today.
10 1
5-26B. PV = PMT
t 1 (1 .09)
t

$45,000 = PMT(6.418)
PMT = $7,012
5 1
5-27B. PV = PMT
t 1 (1 i) t
$45,000 = $9,000 (PVIFAi%, 5 yr.)
5.0 = PVIFAi%, 5 yr.
i = 0%
5-28B. PV = FVn
$15,000 = $37,313 (PVIFi%, 5 yr.)
.402 = PVIF20%, 5 yr.
Thus, i = 20%

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 n 1
5-29B. PV = PMT
t 1 (1 i)
t

4 1
$30,000 = PMT
t 1 (1 .13) t

$30,000 = PMT(2.974)
PMT = $10,087
5-30B. The present value of $10,000 in 12 years at 11 percent is:
PV = FVn ()
PV = $10,000 ()
PV = $10,000 (.286)
PV = $2,860
The present value of $25,000 in 25 years at 11 percent is:
PV = $25,000 ()
= $25,000 (.074)
= $1,850
Thus take the $10,000 in 12 years.
n 1
5-31B. FVn = PMT (1 i) t
t0
5 1 t
$30,000 = PMT (1 .10)
t 0
$30,000 = PMT(6.105)
PMT =$4,914
n 1 t
5-32B. (a) FV = (1 i)
t0
15 1 t
$75,000 = (1 .08)
t0
$75,000 = PMT (FVIFA8%, 15 yr.)

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 $75,000 = PMT(27.152)
PMT = $2,762.23. per year
(b) PV = FVn
PV = $75,000 (PVIF8%, 15 yr.)
PV = $75,000(.315)
PV = $23,625 deposited today
(c) The contribution of the $20,000 deposit toward the $75,000 goal is
FVn = PV (1 + i)n
FVn = $20,000 (FVIF8%, 10 yr.)
FV10 = $20,000(2.159)
= $43,180
Thus only $31,820 need be accumulated by annual deposit.
n 1 t
FV = PMT (1 i)
t0
$31,820 = PMT (FVIFA8%, 15 yr.)
$31,820 = PMT [27.152]
PMT = $1,171.92 per year
5-33B.(a) This problem can be subdivided into (1) the compound value of the $150,000
in the savings account, (2) the compound value of the $250,000 in stocks, (3)
the additional savings due to depositing $8,000 per year in the savings
account for 10 years, and (4) the additional saving due to depositing $2,000
per year in the savings account at the end of years 6-10. (Note the $10,000
deposited in years 6-10 is covered in parts (3) and (4).)

(1) Future value of $150,000

FV10 = $150,000 (1 + .08)10
FV10 = $150,000 (2.159)
FV10 = $323,850
(2) Future value of $250,000
FV10 = $250,000 (1 + .12)10
FV10 = $250,000 (3.106)
FV10 = $776,500

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 (3) Compound annuity of $8,000, 10 years
n 1
FV10 = PMT (1 i) t
t0

10 1
= $8,000 (1 .08) t
t0
= $8,000 (14.487)
= $115,896
(4) Compound annuity of $2,000 (years 6-10)
5 1
FV5 = $2,000 (1 .08) t
t0
= $2,000 (5.867)
= $11,734
At the end of ten years you will have $323,850 + $776,500 +
$115,896
+ $11,734 = $1,227,980.
20 1
(b) PV = PMT t


t 1 (1 .11)
$1,227,980 = PMT (7.963)
PMT = $154,210.72
5-34B. PV = PMT (PVIFAi%, n yr.)
$200,000 = PMT (PVIFA10%, 20 yr.)
$200,000 = PMT(8.514)
PMT = $23,491
5-35B. PV = PMT (PVIFAi%, n yr.)
$250,000 = PMT (PVIFA9%, 30 yr.)
$250,000 = PMT(10.274)
PMT = $24,333
5-36B. At 10%:
PV = $40,000 + $40,000 (PVIFA10%, 24 yr.)
PV = $40,000 + $40,000 (8.985)
PV = $40,000 + $359,400
PV = $399,400

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 At 20%:
PV = $40,000 + $40,000 (PVIFA20%, 24 yr.)
PV = $40,000 + $40,000 (4.938)
PV = $40,000 + $197,520
PV = $237,520
5-37B FVn(annuity due) = PMT(FVIFAi,n)(l + i)
= $1000(FVIFA5%, 5 years)(l + .05)
= $1000(5.526)(1.05)
= $5802.30
FVn(annuity due) = PMT(FVIFAi,n)(l + i)
= $1,000(FVIFA8%, 5 years)(1 + .08)
= $1,000(5.867)(1.08)
= $6,336.36
5-38B. PVn(annuity due) = PMT(PVIFAi,n)(l + i)
= $1000 (PVIFA12%, 15 years)(1 + .12)
= $1000(6.811)(1.12)
= $7,628.32
PVn(annuity due) = PMT(PVIFAi,n)(l + i)
= $1000(PVIFA15%, 15 years)(l + .15)
= $1000(5.847)(1.15)
= $6,724.05
5-39B. PV = PMT(PVIFAi,n)(PVIFi,n)
= $1000(PVIFA15%,10 years)(PVIF15%, 7 years)
= $1000(5.019)(.376)
= $1,887.14
5-40B. FV = PMT (FVIFi%, n yr.)
$3,500 = .12(FVIFi%, 38 yr.)
solving using a financial calculator:
i = 31.0681%

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5-41B. (a)

1/02 1/07 1/12 1/17 1/22 1/27

$50,000

$50,000 per year $250,000 $100,000

There are a number of equivalent ways to discount these cash flows back to
present, one of which is as follows (in equation form):

PV = $60,000 (PVIFA10%, 19 yr. - PVIFA10%, 4 yr.)

+ $300,000 (PVIF10%, 20 yr.)
+ $60,000 (PVIF10%, 23 yr. + PVIF10%, 24 yr.)
+ $100,000 (PVIF10%, 25 yr.)
= $60,000 (8.365-3.170) + $300,000 (.149)
+ $60,000 (0.112 + .102) + $100,000 (.092)
= $311,700 + $44,700 + $12,840 + $9,200
= $378,440
(b) If you live longer than expected you could end up with no money later on in life.

139