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# Chapter2:TimeValueofMoney

PracticeProblems
FVofalumpsum
i.

Acompanys2005saleswere\$100million.Ifsalesgrowat8%peryear,howlarge
willtheybe10yearslater,in2015,inmillions?

PVofalumpsum
ii.

SupposeaU.S.governmentbondwillpay\$1,000threeyearsfromnow.Ifthegoing
interestrateon3yeargovernmentbondsis4%,howmuchisthebondworthtoday?

Interestrateonasimplelumpsuminvestment
iii.

TheU.S.Treasuryofferstosellyouabondfor\$613.81.Nopaymentswillbemade
untilthebondmatures10yearsfromnow,atwhichtimeitwillberedeemedfor
\$1,000. What interest rate would you earn if you bought this bond at the offer
price?

Numberofperiods
iv.

AddicoCorp's2005earningspersharewere\$2,anditsgrowthrateduringtheprior
5yearswas11.0%peryear.Ifthatgrowthrateweremaintained,howlongwouldit
takeforAddicosEPStodouble?

PVofanordinaryannuity
v.

Youhaveachancetobuyanannuitythatpays\$1,000attheendofeachyearfor5
years. You could earn 6% on your money in other investments with equal risk.
Whatisthemostyoushouldpayfortheannuity?

Paymentsonanannualannuity
vi.

Supposeyouinherited\$200,000andinvesteditat6%peryear.Howmuchcould
youwithdrawattheendofeachofthenext15years?

Paymentsonamonthlyannuity
vii.

You are buying your first house for \$220,000, and are paying \$30,000 as a down
payment.Youhavearrangedtofinancetheremaining\$190,00030yearmortgage
with a 7% nominal interest rate and monthly payments. What are the equal
monthlypaymentsyoumustmake?

PVofaperpetuity
viii.

Whatsthepresentvalueofaperpetuitythatpays\$100peryeariftheappropriate
interestrateis6%?

Rateofreturnonaperpetuity
ix.

Whatstherateofreturnyouwouldearnifyoupaid\$1,500foraperpetuitythat
pays\$105peryear?

PVofanunevencashflowstream
x.

Atarateof8%,whatisthepresentvalueofthefollowingcashflowstream?\$0at
Time0;\$100attheendofYear1;\$300attheendofYear2;\$0attheendofYear3;
and\$500attheendofYear4?

i.

FV of a lump sum
N
I/YR
PV
PMT
FV

ii.

iii.

iv.

v.

vi.

EASY

Answer: a

EASY

Answer: c

EASY

Answer: c

EASY

5
6.00%
\$4,212.36
-\$1,000
\$0.00

## Payments on an ordinary annuity

N
I/YR
PV
PMT
FV

Answer: e

6.64
11.00%
-\$2.00
\$0
\$4.00

PV of an ordinary annuity
N
I/YR
PV
PMT
FV

EASY

10
5.00%
-\$613.81
\$0
\$1,000.00

Number of periods
N
I/YR
PV
PMT
FV

Answer: c

3
4%
\$889.00
\$0
-\$1,000.00

## Interest rate on a simple lump sum investment

N
I/YR
PV
PMT
FV

EASY

10
8%
-\$100.00
\$0.00
\$215.89

PV of a lump sum
N
I/YR
PV
PMT
FV

Answer: e

15
6.00%
-\$200,000
\$20,592.55
\$0.00

vii.

Mortgage payments
N
I
PV
PMT
FV

Answer: c

360
0.5833%
\$190,000
-\$1,264
\$0.00

viii. PV of a perpetuity
I/YR
PMT
PV

ix.

x.

CFs:
PV of CFs:
PV =
PV =

EASY

Answer: b

EASY

Answer: a

EASY

\$1,500
\$105
7.00% Divide PMT by Cost.

## PV of an uneven cash flow stream

I/YR =

Answer: e

6.00%
\$100
\$1,666.67 Divide PMT by I.

## Rate of return on a perpetuity

Cost (PV)
PMT
I/YR

MEDIUM

8%
0
\$0
\$0
\$717.31
\$717.31

1
2
3
4
\$100
\$300
\$0
\$500
\$92.59
\$257.20
\$0
\$367.51
Find the individual PVs and sum them.
Automate the process using Excel or a calculator, by inputting
the data into the cash flow register and pressing the NPV key.