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    Tutorial 3 Answer

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    Syuhaidah Binti Aziz Zudin
    This document contains sample questions and problems related to the time value of money concept discussed in Chapter 4. [1] It provides examples of calculating future value, present value, interest rates, and number of periods for lump sum investments given various inputs. [2] Key considerations in deciding whether to pay a present value in exchange for a future value include the interest rate relative to other investments and the risk of actually receiving the future payment. [3] Contributing earlier to retirement accounts allows earnings to compound over more periods, resulting in significantly higher account balances at retirement compared to delayed contributions.

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    © All Rights Reserved
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    Tutorial 3 Answer

    Uploaded by

    Syuhaidah Binti Aziz Zudin
    335 views3 pages
    This document contains sample questions and problems related to the time value of money concept discussed in Chapter 4. [1] It provides examples of calculating future value, present value, interest rates, and number of periods for lump sum investments given various inputs. [2] Key considerations in deciding whether to pay a present value in exchange for a future value include the interest rate relative to other investments and the risk of actually receiving the future payment. [3] Contributing earlier to retirement accounts allows earnings to compound over more periods, resulting in significantly higher account balances at retirement compared to delayed contributions.

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    This document contains sample questions and problems related to the time value of money concept discussed in Chapter 4. [1] It provides examples of calculating future value, present value, interest rates, and number of periods for lump sum investments given various inputs. [2] Key considerations in deciding whether to pay a present value in exchange for a future value include the interest rate relative to other investments and the risk of actually receiving the future payment. [3] Contributing earlier to retirement accounts allows earnings to compound over more periods, resulting in significantly higher account balances at retirement compared to delayed contributions.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    335 views3 pages

    Tutorial 3 Answer

    Uploaded by

    Syuhaidah Binti Aziz Zudin
    This document contains sample questions and problems related to the time value of money concept discussed in Chapter 4. [1] It provides examples of calculating future value, present value, interest rates, and number of periods for lump sum investments given various inputs. [2] Key considerations in deciding whether to pay a present value in exchange for a future value include the interest rate relative to other investments and the risk of actually receiving the future payment. [3] Contributing earlier to retirement accounts allows earnings to compound over more periods, resulting in significantly higher account balances at retirement compared to delayed contributions.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    BFM 1014 FUNDAMENTALS OF FINANCE

    Trimester 2, 2016-2017

    CHAPTER 4: TIME VALUE OF MONEY

    CRITICAL THINKING AND CONCEPT REVIEW

    3. What happens to a future value if you increase the rate? R? What happens to present value?

    The future value rises (assuming a positive rate of return); the present value falls.

    8. Would you be willing to pay $24,099 today in exchange for $100,000 in 30 years? What would
    be the key considerations in answering yes or no? Would your answer depend on who is making
    the promise to repay?

    The key considerations would be:

    (1) Is the rate of return implicit in the offer attractive relative to other, similar risk investments? and

    (2) How risky is the investment; i.e., how certain are we that we will actually get the $100,000?

    Thus, our answer does depend on who is making the promise to repay.

    QUESTIONS AND PROBLEM

    2. For each of the following, compute the future value

    Present Value Years Interest Rate Future Value


    $ 3,150 6 13% $6,558.15
    8,453 19 7 $30,570.51
    89,305 13 9 $273,791.68
    227,382 21 5 $633,477.75

    3. For each of the following, compute the Present Value

    Present Value Years Interest Rate Future Value


    $9,621.62 15 4% $ 17,328
    $20,835.98 8 9 41,517
    $181,135.15 13 12 790,382
    $47,684.50 25 11 647,816

    4. For each of the following, compute the Interest Rate

    Present Value Years Interest Rate Future Value


    $ 715 9 r = .0759, or 7.59% $ 1,381
    905 6 r = .1127, or 11.27% 1,718
    15,000 21 r = .1129, or 11.29% 141,832
    70,300 18 r = .0865, or 8.65% 312,815
    1
    5. For each of the following, compute the Number of periods.

    Present Value Years Interest Rate Future Value


    $ 195 t = 20.13 years 9% $ 1,105
    2,105 t = 8.34 years 7 3,700
    47,800 t = 18.46 years 12 387,120
    38,650 t = 9.40 years 19 198,212

    6. Assume the total cost of a college education will be $280,000 when your child enters college in
    18 years. You presently have $45,000 to invest. What annual rate of interest must you earn on
    your investment to cover the cost of your child’s college education?
    0 18

    –$45,000 $280,000

    To answer this question, we can use either the FV or the PV formula. Both will give the same answer
    since they are the inverse of each other. We will use the FV formula, that is:

    FV = PV(1 + r)t

    Solving for r, we get:

    r = (FV / PV)1 / t – 1
    r = ($280,000 / $45,000)1/18 – 1
    r = .1069, or 10.69%

    12. Your coin collection contains 50 1952 silver dollars. If our grandparents purchased then for
    their face value when they were new, how much will collection be worth when you retire in 2058,
    assuming they appreciate at a 6.1 % annual rate?

    The time line is:

    0 106

    50 FV

    To find the FV of a lump sum, we use:

    FV = PV(1 + r)t
    FV = $50(1.061)106
    FV = $26,595.04

    13. In 1895, the first US Open Golf Championship was held. The winner’s prize money was $150. In
    2011, the winner’s check was $ 1,440,000. What was the annual percentage increase in the
    winner’s check over this period? If the winner’s prize increases at the same rate, what will it be in
    2045?

    2
    The time line is:

    0 116

    $150 $1,440,000

    To answer this question, we can use either the FV or the PV formula. Both will give the same answer
    since they are the inverse of each other. We will use the FV formula, that is:

    FV = PV(1 + r)t

    Solving for r, we get:

    r = (FV / PV)1 / t – 1
    r = ($1,440,000 / $150)1/116 – 1
    r = .0823, or 8.23%

    To find the FV of the first prize in 2045, we use:

    0 34

    $1,440,000 FV

    FV = PV(1 + r)t
    FV = $1,440,000(1.0823)34
    FV = $21,163,131.11

    18. You have just made your first $5,000 contribution to your individual retirement account.
    Assuming you earn a 10.1 % annual rate of return and make no additional contributions, what will
    your account worth when you retire in 45 years? What if you wait 10 years before contributing?
    (Does this suggest an investment strategy?)

    To find the FV of a lump sum, we use:

    FV = PV(1 + r)t

    0 45

    $5,000 FV

    FV = $5,000(1.1010)45
    FV = $379,663.95

    If you wait 10 years, the value of your deposit at your retirement will be:

    0 35

    $5,000 FV

    FV = $5,000(1.1010)35
    FV = $145,052.82

    Better start early!

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