PROBLEMS ON TIME VALUE OF MONEY

Q1 First City Bank pays 8 per cent simple interest on its savings account balances, whereas Second City bank
If you made a $5000 deposit in each bank, how much more money would you earn from you earn from yo
account at the end of 10 years?

ANS Simple Interest per year

amt 5000
interest 0.08
SI per year 400

Total Interest =400*10

4000

The total balance =5000+4000

9000

With compund interest we use the FV formula

FV=PV(1+r)^t
FV=5000(1+.08)^10
10794.62498636

So the difference is 10794.62-9000

1794.62498636

2 For each of the following compute the future value

PRESENT VALUE YEARS INTEREST

$2,250 11 10%
8752 7 8
76355 14 17
183796 8 7

SOLUTION PV NPER RATE FV

2250 11 0.1 $6,419.51
8752 7 0.08 $14,999.39
76355 14 0.17 $687,764.17
183796 8 0.07 $315,795.75

3 For each of the following compute the PV

 FUTURE VALUE YEARS INTEREST
15451 6 7%
51557 7 13
886073 23 14
550164 18 9

SOLUTION
FV NPER RATE PV
15451 6 0.07 $10,295.65
51557 7 0.13 $21,914.85
886073 23 0.14 $43,516.90
550164 18 0.09 $116,631.32

4 Assume that the total cost of a college education will be $290,000 when your child enters
college in 18 years; You presently have $55000 to invest. What annual rate of interest must you
earn on your investment to cover the cost of your childs college education?

SOLUTION
PV 55000
NPER 18
RATE ???
FV 290000
ANNUAL RATE OF INTEREST 9.68%

5 You expect to receive $10,000 at graduation in two years. You plan on investing it at 11 per cent
until you have $75,000.How long will you wait from now?

SOLUTION

FV 75000
PV 10000
RATE 0.11
NPER 19.307232

19.31 YEARS

SO THE MONEY MUST BE INVESTED FOR 19.31 YEARS . HOWEVER YOU WILL NOT
RECEIVE THE MONEY FOR ANOTHER TWO YEARS .FROM NOW YOU WILL WAIT FOR
2+19.31=21.31 YEARS

6 You have just made your first $4000 contribution to your retirement account. Assuming that yo
 earn an 11 percent rate of return and make no additional contributions ,what will your account
be worth when you retire in 45 years ? What if you wait 10 years before contributing

SOLUTION
PV 4000
RATE 0.11
NPER 45
FV $438,120.97

PV 4000
RATE 0.11
NPER 35
FV $154,299.40
nces, whereas Second City bank pays 8 per cent interest compounded annually.
d you earn from you earn from your Second City Bank
your child enters
e of interest must you

11 per cent

RS . HOWEVER YOU WILL NOT

ROM NOW YOU WILL WAIT FOR

ment account. Assuming that you

ributions ,what will your account
ars before contributing