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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.