Chapter # 02

Time Value of Money

Reasons behind change of Value

Investment Opportunity

Uncertainty

Inflation

Time Value of Money

Single Payment

Annuity

Mixed Stream

Future Value (problem# P5-6)

As part of your financial planning, you wish to

purchase a new car exactly 5 years from today.
The car you wish to purchase costs
Tk.14,00,000 today and your research indicates
that its price will increase by 6% per year over
next 5 years.

a)

Estimate the price of the car at the end of 5 years.

a)

Estimate the price of the car if the rate of inflation is 4%

for the first 2 years and 6% for the next 3 years .

Future Value
You

can make a deposit of Tk.

100,000 into an account paying 9%
annual interest today. How much will
you get at the end of 40 years?

Present Value (problem# P5-12)

Mr. Rahman needs Tk. 10,00,000 for his

daughters marriage purpose after 6 years
from now. What single investment he
should make today, earning 12% annual
interest rate to get the required amount
after 6 years?

Problem No. P5-13

Jim Nance has been offered an investment

that will pay him $500 three years from
now. If his opportunity cost is 7%
compounded annually, what value should
he place on this opportunity today?

Interest Rate (problem# P5-8)

Mitali Garments Limited plans to invest Tk.

15,00,000 to purchase some new machineries
after 5 years from now. The company is willing to
invest a lump sum today and leave the money
untouched for 5 years until it grows to Tk.
15,00,000, but the company wonders what sort of
investment return it will need to earn to reach its
goal. Find out the rate of return should be earned
by the company during the period if it invests Tk.
10,20,000 today.

Number of year (problem# P5-59)

Manuel Rios has recently opened a fixed

deposit where he has deposited Tk.
1,00,000 with an annual 10% interest rate.
Now he wants to know how long he should
keep the money with this account so that
his deposit amount doubles.

Semi-annual, Quarterly or Monthly

Compounding Interest rate

You have purchased a 5 years bond with

10% annual interest rate with a price of Tk.
20,000. The issuing company of the bond
has decided to provide interest quarterly
and make the total payment of interest and
principal at the end of the maturity.

How much will you get in total from this

investment at the end of the maturity?

Future Value of Annuity (problem# P5-22)

Hal Thomas, a 25-year college graduate, whishes to retire at age

65. To supplement other sources of retirement income, he can
deposit Tk. 2,000 each year into a tax deferred individual retirement
arrangement (IRA). The IRA will earn a 10% return over the next 40
years.

a. If Hal makes end-of-year Tk. 2,000 deposits into the IRA, how much
will he have accumulated by the end of his sixty-fifth year?
b. If Hal decides to wait until age 35 to begin making annual end-ofyear Tk. 2,000 deposits into the IRA, how much will he have
accumulated by the end od his sixty-fifth year?
c. Using your findings in parts a and b, discuss the impact of delaying
making deposits into the IRA for 10 years (age 25 to age 35) on the
amount accumulated by the end of Hals sixty-fifth year.
d. Rework part a, assuming that the deposit will be made at the
beginning of each year.

Present Value of Annuity (problem#

P5-24)

Mr. Tom plans to retire in exactly 20 years. His goal is

to create a fund that will allow him to receive Tk.
20,000 at the end of each year for the next 10 years
to meet up his sons educational expenses. Mr. Tom
knows that he will be able to earn 11% per year
during the 10 year period.

a.

How large a fund will he need when he retires in 20 years to

provide the 10-year, Tk. 20,000 retirement annuity?

a.

How much will he need today as a single amount to provide the

fund calculated in part a if he earns only 9% per year during
the 20 years preceding retirement?

Present Value of Annuity

c. Now assume that Mr. Tom will earn 10%
from now through the end of your
retirement. He wants to make 20 endofyear deposits into his retirement account
that will fund the 10-year stream of Tk.
20,000 annual annuity payments. How
large do your annual deposits have to be?

Time in Annuity ((problem# P5-61)

Miss. Salto wishes to determine how long it

will take to repay a loan with initial
proceeds of Tk. 14,000 where annual endof year installment payments of Tk. 2,450
are required. If she can borrow at a 12%
annual rate of interest, how long will it take
for her to repay the loan fully?

Interest rate for an Annuity

Anna was seriously injured in an industrial accident. She sued the

responsible parties and was awarded a judgment of Tk. 2,000,000.
Today, she and her lawyer are attending a meeting with the
defendants. The defendants have made an initial offer of Tk. 156,000
per year for 25 years. Anna plans to counteroffer at Tk. 255,000 per
year for next 25 years. Both the offer and the counter offer have a
present value of Tk 2,000,000, the amount of the judgment. Both
assume payments at the end of each year.

a. What interest rate assumption have the defendants used in their

offer?
b. What interest rate assumption have Anna used in their offer?
c. Anna is willing to settle for an annuity that carries an interest rate
assumption of 9%. What annual payment would be acceptable to
her?

Semi-annual, Quarterly or Monthly

Compounding Interest rate

You have decided to purchase a car by

taking a bank loan with annual interest rate
of 12% compounded monthly basis. You
will take the loan for 8 years and for that
you are ready to make an installment
payment of Tk. 15,000 per month. Find out
maximum how much you can prevail as
bank loan right now?

Semi-annual, Quarterly or Monthly

Compounding Interest rate

In your employer organization, you contribute in

your provident fund Tk. 2500 every month. The
organization has promised you to provide 11%
annual interest compounded monthly basis. You
worked for this organization for last 5 years and
now have decided to switch to a new company
after two years from now. How much will you be
able to claim from your current employer under
provident fund?

Perpetuity of Annuity
On completion of her introductory finance course, Marla
was so pleased with the amount of useful and
interesting knowledge she gained that she convinced
her parents, who were wealthy alumni of the university
she was attending, to create am endowment. The
endowment is to allow three needy students to take the
introductory finance course each year in perpetuity. The
guaranteed annual cost of tuition and books for the
course is $600 per student. The endowment will be
created by making a single payment to the university.
The university expects to earn exactly 6% per year on
these funds. How large an initial single payment must
Marlas parents make to the university to fund the
endowment?

Mixed Stream
(a) Harte Systems Inc., a maker of electronic equipment, is
considering selling to a well-known hardware chain the rights to
market its home security system. The proposed deal call for the
hardware chain to pay Harte Tk. 30,000, Tk. 25,000 and Tk.
40,000 at the end of 1, 2 and 3 year respectively.
If Harte applies a required rate of return of 12% to them, what
is the present value of this series of payment?
(b) In the above case say Harte will receive Tk. 30,000 and Tk.
25,000 in 1 & 2 year respectively and then from year 3-5 will
receive Tk. 15,000 at the end of each year. Lastly it will receive
Tk. 10,000 at the end of 6th year. Now calculate the present
value of the cash flow stream.

Loan Amortization Schedule

(a)
(b)

John Messino borrowed Tk.150,000 at a

14% annual rate of interest to be repaid
over 5 years. The loan is amortized into
five equal, annual, end of year payments.
Calculate the annual end-of-year
payment.
Prepare a loan amortization schedule.

Thank You