TVM Review Questions 1

FINC 1302 F UNDAMENTALS OF F I NANCI AL M ANAGEMENT
T I ME V ALUE OF M ONEY – R EVI EW Q UESTI ONS
1. If RM10,000 is invested for a period of 7 years, and the rate of return on that
investment is 5%, what is the value of this investment in 7 years’ time?
2. What is the present value of RM1,000 to be received 8 years from today, assuming an
opportunity cost of 9%?
3. What is the future value of a 5-year ordinary annuity with annual payments of
RM200, evaluated at a 15% interest rate?
4. Professor Obi will receive RM10,000 per year for the next 10 years as royalty for his
work on a book on finance. What is the present value of his royalty income if the
opportunity cost is 12%?
5. What is the future value of 7-year annuity due with annual payments of RM350,
assuming a rate of return of 12%?
6. Given a 11% rate of return, which of the following has the highest present value?
a. 5-year ordinary annuity with annual payments of RM1,000
b. 5-year annuity due with annual payments of RM1,000
c. 4-year ordinary annuity with annual payments of RM1,000
d. 5-year annuity due with annual payments of RM900
7. What is the present value of a RM26,000 perpetuity at a 12% discount rate?
8. A particular investment will give a cash flow return of RM5,000 after one year,
RM12,000 after 2 years, RM7,400 after 3 years and RM5,000 after 4 years. Based on
this stream of cash flow, what is the present value of this investment, given a 10%
required rate of return?
9. What is the future value of RM1,000 after one year, at a 24% interest rate,
compounded monthly?
10. Assume that you have just won a contest where the prize is RM2.5 million. The
contest rules stipulate that you will be paid this amount periodically (that is,
RM100,000 at the end of each year for the next 25 years). However, the contest
organizers have offered to pay you a lump sum amount of RM1.3 million, which you
will receive now. If you can earn 5% annually on your investments, would you take
this offer?
11. A very generous benefactor would like to make a one-time endowment (gift) which
would provide a local orphanage with RM150,000 per year, forever. The rate of
interest is expected to be 5% for all future time periods. How large must the
endowment be?
12. One day you discovered that you inherited a savings account left to you by a distant
uncle. 30 years ago the balance of the account was RM571.45. Assuming that all these
years, the account continues to earn interest at a constant rate of 4%, what would you
expect balance of this account to be today?
13. At the end of every year, Ahmad will take RM5,000 from what he has saved up for
the year and put it in his ASB account. Assuming that ASB provides a constant
return of 11%, how much will Ahmad have in his ASB account after doing this for 6
years?
14. You have two investment choices. With the same investment outlay, Investment
Option 1 will give a payout of RM12,000 in 3 years’ time. Investment Option 2 gives
a higher payout of RM15,000 but it will only be received in 5 years’ time. If the
required rate of return is 10%, which investment option would you choose?
15. You would like to buy a new car in 5 years’ time. For some reason, you don’t want to
get financing and would like to purchase the vehicle in cash. So you start saving now,
by putting aside RM12,500 at the beginning of each year, starting now, for 5 years. If
your savings earn a return of 9%, what is the highest price of a car that you can
afford based on your 5-year savings?
16. You have RM2,500 to deposit into a bank account. You have a choice between 2
banks. Bank A offers a rate of 4.2% (compounded annually) while Bank B offers a
rate of 4% but it is compounded quarterly. Which bank would you deposit your
money in? (Hint: try to determine how much would be in the bank account after one
year, in each case)
17. A person approaches you with this investment opportunity – all you need to do is
pay RM1,000 today, and you will receive RM180 at the beginning of each year, for
the next 7 years. If you can earn 5% return on a comparable investment, would you
take up this investment?

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FINC 1302 F UNDAMENTALS OF F I NANCI AL M ANAGEMENT

T I ME V ALUE OF M ONEY – R EVI EW Q UESTI ONS

7. What is the present value of a RM26,000 perpetuity at a 12% discount rate?

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