Time value of money

Exercises
 Exercise 1

If you deposit $1,000 over three years at 9% annual

compounded interest ,what is the interest earned in the 2nd
year?

a) $106.93
b) $98.34
c) $98.10
d) $90.00
 Answer
Interest earned at the end of year 1 is:
$1000 x 0.09= $90

Principal at the end of year 1 is:

$1000 + $90= $1090

Interest earned at the end of year 2 is:

$1090 x 0.09= $98.1
 Exercise 2

What is the present worth of the following income

strings at an interest rate of 10%? (All cash flows
occur at year end.)

a) $37,741
b) $30,000
c) $32,450
d) $43,923
Answer
 Exercise 3
Assume that $200 is deposited today, two years from now, four years from
now, six years from now, and eight years from now in a savings account
which earns 10% annual interest, what is the balance at the end of year 9?

a) $708
b) $1,670
c) $1,100
d) $1,517
 Answer

FF=$1670
 Exercise 4

You borrowed $1,000 at 8%, compounded annually. The loan

was repaid according to the following schedule. What is the
value of X?

a) $460
b) $298
c) $345
d) $108
 Answer
By getting the present:

By getting the future:

 Exercise 5

Two banks offer different interest rates on your deposit of

$10,000 over 3 years. Bank A offers an 8% interest
compounded annually and Bank B offers an 8.5% simple annual
interest. Which of the following statements is true?

a) With Bank B, the total balance at the end of year 3 would be $12,773.
b) You earn the same amount of interest over 3 years.
c) With Bank B you earn $150 more interest than with Bank A
d) With Bank A you earn $47 more than with Bank B
 Answer

• Bank A: compound • Bank B: simple interest

interest 8% of 8.5%

F= P(F/P,8%,3) simple interest per 1 year

F=10000(1.2597) 10000x0.085=850
F=12597 simple interest per 3 years
850x3=2550
F= 10000 + 2550=12550

With Bank A you earn $47 more than Bank B

 Exercise 6
How many years will it take for an investment to double itself
if the interest rate is 8% compounded annually?

a) 8.5 < N ≤ 9.5 years

b) 9.5 < N ≤ 10.5 years
c) 10.5 < N ≤ 11.5 years
d) 7.5 < N ≤ 8.5 years
 Answer

F=2P
Equate both equations:
2P=
Ln 2=N ln(1.08)
N=9 years
 Exercise 7
• What value of X makes these two cash flows
equivalent assuming an interest rate of 10%?
• Getting PW of the left hand side:

• Getting PW of the right hand side

• Equating both sides