EF209 Financial Management Lecture 2 Time Value of Money Tutorial Answers PDF

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Tutorial Answers to Time Value of Money Chapter Questions for EF209 Financial Management...

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Chapter 09: Time Value of Money

Chapter 9 Time Value of Money Chapter 9

5.

Future value (LO2) If you invest $12,000 today, how much will you have: a. In 6 years at 7 percent? b. In 15 years at 12 percent? c. In 25 years at 10 percent? d. In 25 years at 10 percent (compounded semiannually)?

9-5.

Solution: $ 18,012 b. $ 65,688 c. $130,020 d. $137,604

6.

Present value (LO3) Your aunt offers you a choice of $20,000 in 50 years or $45 today. If money is discounted at 13 percent, which should you choose?

9-6.

Solution: $40 Choose $45 today.

10. Present Value (LO3) How much would you have to invest today to receive: a. b. c. d.

$12,000 in 6 years at 12 percent? $15,000 in 15 years at 8 percent? $5,000 each year for 10 years at 8 percent? $40,000 each year for 40 years at 5 percent?

9-10. Solution: = $ 6,084 b. $ 4,725

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Chapter 09: Time Value of Money

c. d.

$ 33,550 $686,360

17. Present value (LO3) The Western Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at the rate of $50,000 a year for the next 20 years. With a discount rate of 12 percent, what is the present value of your winnings?

9-17. Solution: $373,450

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Chapter 09: Time Value of Money

18. Present value (LO3) Rita Gonzales won the $60 million lottery. She is to receive $1 million a year for the next 50 years plus an additional lump sum payment of $10 million after 50 years. The discount rate is 10 percent. What is the current value of her winnings?

9-18. Solution: $10,005,000 23. Present value (LO3) Barney Smith invests in a stock that will pay dividends of $3.00 at the end of the first year; $3.30 at the end of the second year; and $3.60 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $50. What is the present value of all future benefits if a discount rate of 11 percent is applied? (Round all values to two places to the right of the decimal point.)

9-23. Solution: $44.56 27. Annuity due (LO4) As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, subtract 1 from n and add 1 to the tabular value. To find the future value of an annuity, add 1 to n and subtract 1 from the tabular value. For example, to find the future value of a $100 payment at the beginning of each period for five periods at 10 percent, go to Appendix C for n = 6 and i = 10 percent. Look up the value of 7.716 and subtract 1 from it for an answer of 6.716 or $671.60 ($100 × 6.716). What is the future value of a 10-year annuity of $2,000 per period where payments come at the beginning of each period? The interest rate is 8 percent.

9-27. Solution: $31,290

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Chapter 09: Time Value of Money

9-38. Solution: $52,736 47. Special consideration of annuities and time periods (LO4) Brittany (from problem 46) is now 18 years old (five years have passed), and she wants to get married instead of going to college. Your parents have accumulated the necessary funds for her education. Instead of her schooling, your parents are paying $10,000 for her current wedding and plan to take year-end vacations costing $3,000 per year for the next three years. How much money will your parents have at the end of three years to help you with graduate school, which you will start then? You plan to work on a master’s and perhaps a PhD. If graduate school costs $32,600 per year, approximately how long will you be able to stay in school based on these funds? Use 10 percent as the appropriate interest rate throughout this problem. (Round all values to whole numbers.

9-47. Solution:

with i = 10%, n = 4 for 3.170, the answer is 4 years.

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