Chapter 5

Time Value of Money—The Basics

5-1. (a) FVn  PV (1 + i)n

FV10  $5000(1 + 0.10)10
FV10  $5000 (2.59374)
FV10 $12,969
(b) FVn  PV (1  i)n
FV7 $8000 (1  0.08)7
FV7  $8000 (1.71382)
FV7  $13,711
(c) FV12  PV (1  i)n
FV12  $775 (1  0.12)12
FV12 $775 (3.896)
FV12 $3019
(d) FVn  PV (1  i)n
FV5 $21,000 (1  0.05)5
FV5 $21,000 (1.2763)
FV5  $26,802

5-2. (a) FVn  PV (1  i)n

compounded forward for 1 year at 6%
FV1  $10,000 (1  0.06)1
FV1  $10,000 (1.06)
FV1  $10,600
compounded forward for 5 years at 6%
FV5  $10,000 (1  0.06)5
FV5  $10,000 (1.3382)
FV5  $13,382
compounded forward for 15 years at 6%
FV15  $10,000 (1  0.06)15
FV15  $10,000 (2.3966)
FV15  $23,966
(b) FVn  PV (1  i)n
compounded forward for 1 year at 8%
FV1 = $10,000 (1  0.08)1
FV1 = $10,000 (1.080)
FV1 = $10,800
compounded forward for 5 years at 8%

108
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 Solutions to End-of-Chapter Problems—Chapter 5 109
FV5  $10,000 (1  0.08) 5

FV5  $10,000 (1.4693)

FV5  $14,693
compounded forward for 15 years at 8%
FV15  $10,000 (1  0.08)15
FV15  $10,000 (3.1722)
FV15  $31,722
compounded forward for 1 year at 10%
FV1  $10,000 (1  0.1)1
FV1  $10,000 (1  1.100)
FV1  $11,000
compounded forward for 5 years at 10%
FV5  $10,000 (1  0.1)5
FV5  $10,000 (1.6105)
FV5  $16,105
compounded forward for 15 years at 10%
FV15  $10,000 (1  0.1)15
FV15  $10,000 (4.1772)
FV15  $41,772
(c) There is a positive relationship between both the interest rate used to compound a present sum, the
number of years for which the compounding continues, and the eventual future sum that results.

5-3. (a) FVn  PV (1  i)n

N  ln (FVn/PV) /ln (1  i)
N  ln (30,000/20,000) /ln (1.07)
N  5.9928 years

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110  Titman/Keown/Martin  Financial Management, Thirteenth Edition
or solve with financial calculator:
N  6.0 years
CPT I/Y  7.0
PV   20,000
PMT  0
FV  30,000
(b) FV
n  PV (1  i)
n

FV10.25  $20,000 (1.07)10.25

FV10.25  $40,014.16
(c) FVn  PV (1 + i)n
N  ln (FVn/PV)/ln (1  i)
N  ln (30,000/20,000)/ln (1.03)
N  13.72 years
or solve with financial calculator:
N  14.0 years
CPT I/Y  3.0
PV   20,000
PMT  0
FV  30,000
N  ln (FVn/PV) /ln (1  i)
N  ln (30,000/20,000)/ln (1.11)
N 3.89 years
or solve with financial calculator:
N  4.0 years
CPT I/Y  11.0
PV   20,000
PMT  0
FV  30,000

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 Solutions to End-of-Chapter Problems—Chapter 5 111
(d) There is an inverse relationship between the interest rate and the time required to achieve a
certain future sum as a result of compounded interest. As the interest rate decreases, more time
is needed to achieve the same future sum.

5-4. FVn  PV (1  i)n

FV200  $12,345(1.0398)200
FV200  $30,300,773.41

i
5-5. FVn  PV (1 + m )mn

Account PV I m n (1 + i
m )mn PV (1 + i
m )mn
Theodore Logan III $1,000 10% 1 10 2.5937 $2,594
Vernell Coles 95,000 12% 12 1 1.12682 107,048
Tina Elliott 8,000 12% 6 2 1.2682 10,146
Wayne Robinson 120,000 8% 4 2 1.17166 140,599
Eunice Chung 30,000 10% 2 4 1.47746 44,32
Kelly Cravens 15,000 12% 3 3 1.4233 21,350

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112  Titman/Keown/Martin  Financial Management, Thirteenth Edition
5-6. (a) FVn  PV (1  i)n
FV5  $5000 (1 + 0.06)5
FV5  $5000 (1.3382)
FV5  $6691
i
(b) FVn  PV (1 + m )mn
2 5
 0.06 
FV5 $5,000  1 
 2 
FV5  $5,000 (1  0.03)10
FV5  $5,000 (1.3439)
FV5  $6,720
i
FVn  PV (1 + m )mn
65
 0.06 
FV5  5,000  1 
 2 
FV5  $5,000 (1 + 0.01)30
FV5  $5,000 (1.3478)
FV5  $6,739
(c) FVn  PV (1  i)n
FV5  $5,000 (1  0.12)5
FV5  $5,000 (1.7623)
FV5  $8,812
i
FV5  PV (1 + m )mn
25
 0.12 
FV5  $5000  1 
 2 
FV5  $5,000 (1 + 0.06)10
FV5  $5,000 (1.7908)
FV5  $8,95
i
FV5  PV (1 + m )mn
65
 0.12 
FV5  $5,000  1 
 2 
FV5  $5,000 (1  0.02)30
FV5  $5,000 (1.8114)
FV5  $9,057
(d) FVn  PV (1  i)n
FV12  $5,000 (1  0.06)12
FV12  $5,000 (2.0122)
FV12  $10,061

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 Solutions to End-of-Chapter Problems—Chapter 5 113
(e) An increase in the stated interest rate will increase the future value of a given sum. Likewise,
an increase in the length of the holding period will increase the future value of a given sum.

5-7. (a) FVn  PV (1  i)n

FV5  $6,000 (1  0.06)5
FV5  $6,000 (1.3382)
FV5  $8,029
i
(b) FVn  PV (1 + m )mn
2 5
 0.06 
FV5  $6,000  1 
 2 
FV5  $6,000 (1  0.03)10
FV5  $6,000 (1.344)
FV5  $8,064
i
FVn  PV (1 + m )mn
6 5
 0.06 
FV5  $6,000  1 
 6 
FV5  $6,000 (1  0.01)30
FV5  $6,000 (1.3478)
FV5  $8,087

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114  Titman/Keown/Martin  Financial Management, Thirteenth Edition
(c) FVn  PV (1  i)n
FV5  $6,000 (1  0.12)5
FV5  $6,000 (1.7623)
FV5  $10,57
i
FV5  PV (1 + m )mn
25
 0.12 
FV5  $6000  1 
 2 
FV5  $6,000 (1 + 0.06)10
FV5  $6,000 (1.7908)
FV5  $10,74
i
FV5  PV (1 + m )mn
65
 0.12 
FV5  $6,000  1 
 6 
FV5  $6,000 (1  0.02)30
FV5  $6,000 (1.8114)
FV5  $10,868
(d) FVn  PV (1  i)n
FV12  $6,000 (1  0.06)12
FV12  $6,000 (2.0122)
FV12  $12,073
(e) An increase in the stated interest rate will increase the future value of a given sum. Likewise,
an increase in the length of the holding period will increase the future value of a given sum.
Furthermore, at any stated annual interest rate, the more compounding periods per year, the
higher the future value of a given sum.

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 Solutions to End-of-Chapter Problems—Chapter 5 115
5-8. Year 1: FVn  PV (1  i)n

FV1  15,000 (1 + 0.20)1

FV1  15,000 (1.20)
FV1  18,000 books
Year 2: FVn  PV (1  i)n
FV2 = 15,000 (1 + 0.20)2
FV2  15,000 (1.44)
FV2  21,600 books
Year 3: FVn  PV (1  i)n
FV3  15,000 (1 + 0.20)3
FV3  15,000 (1.728)
FV3  25,920 books
The sales trend graph is not linear because this is a compound growth trend. With compound interest,
interest paid on the investment during the first period is added to the principal of the second period,
and interest in the second period is earned on the new total. Similarly, book sales growth was
compounded; thus the first year the growth was 20% of 15,000 books, the second year 20 % of
18,000 books, and the third year 20% of 21,600 books.

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116  Titman/Keown/Martin  Financial Management, Thirteenth Edition
5-9. Year 1: FVn  PV (1  i)n
FV1  10,000 (1  0.15)1
FV1  10,000 (1.15)
FV1  11,500 headphones

Year 2: FVn  PV (1  i)n

FV2  10,000 (1  0.15)2
FV2  10,000 (1.3225)
FV2 13,225 headphones
Year 3: FVn  PV (1  i)n
FV3  10,000 (1  0.15)3
FV3  10,000 (1.5209)
FV3  15,209 headphones

The sales trend graph is not linear because this is a compound growth trend. With compound
interest, interest paid on the investment during the first period is added to the principal of the
second period, and interest in the second period is earned on the new total. Similarly, headphone
sales growth was compounded; thus the first year the growth was 15% of 10,000 headphones, the
second year 15% of 11,500 headphones, and the third year 15% of 13,220 headphones.

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 Solutions to End-of-Chapter Problems—Chapter 5 117

5-10. FVn  PV (1  i)n

FV35  $3,500(1.11)35
FV35  $3,500 (38.5748)
FV35  $135,012
FV40  $3500 (1.11)40
FV40  $3500 (65.0009)
FV40  $227,503

5-11. YEAR Beginning Value Compound Interest End Value

1 $10,000 $1,100 $11,100
2 $11,100 $1,221 $12,321
3 $12,321 $1,355.31 $13,676.31

Simple interest is the same 1,100 per year based on the original principal. The compound interest in
year 3 is 1,355.31, which is 255.31 more than simple interest.

5-12. @4% PV  FVn/(1  i)n

PV  $2,000,000/(1.04)35
PV = $506,830.94

@14% PV  FVn/(1  i)n

PV  $2,000,000/(1.14)35
PV = $20,387
@14% N ln (FVn/PV)/ln (1 + i)

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118  Titman/Keown/Martin  Financial Management, Thirteenth Edition
N  ln (2,000,000/506,830.94)/ln (1.14)
N  1.373/0.131
N  10.48 years

5-13. (a) N  ln (FVn/PV)/ln (1+ i)

N  ln (1,039.5/500)/ln (1.05)
N  0.7319/ 0.0488
N  15 years
(b) N  ln (FVn/PV)/ln (1  i)
N  ln (53.87/35)/ln (1.09)
N  0.4312/0.0862
N  5 years
(c) N  ln (FVn/PV)/ln (1  i)
N  ln (298.60/100)/ln (1.20)
N  1.0939/0.1823
N  6 years
(d) N  ln (FVn/PV)/ln (1  i)
N  ln (78.76/53)/ln (1.02)
N  0.3961/0.0198
N  20 years

5-14. (a) FVn  PV (1  i)n

$1,948  $500 (1  i)12
3.896  (1  i)12
(3.896)1/12 1i
1.12  1+i
i  0.12 or 12%
(b) FVn  PV (1 + i)n
$422.10  $300 (1  i)7
1.407  (1  i)7
(1.407)1/7 1i
1.05 1i
i  0.05 or 5%
(c) FVn  PV (1 + i)n
$280.20  $50 (1  i)20
5.604  (1  i)20
(5.604)1/20 1i
i  0.09 or 9%
(d) FVn  PV (1  i)n
$497.60  $200 (1  i)5
2.488  (1  i)5
(2.488)1/5 1i
i  0.20 or 20%

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 Solutions to End-of-Chapter Problems—Chapter 5 119

 1 
5-15. (a) PV  FVn  n 
 (1  i ) 
 1 
PV  $800  10 
 (1  0.1) 
PV  $800 (0.3855)
PV  $308
 1 
(b) PV = FVn  n 
 (1  i ) 
 1 
PV  $300  5 
 (1  0.05) 
PV = $300 (0.7835)
PV  $235
 1 
(c) PV = FVn  n 
 (1  i ) 
 1 
PV  $1,000  8 
 (1  0.03) 
PV  $1,000 (0.7894)
PV  $789
 1 
(d) PV  FVn  n 
 (1  i ) 
 1 
PV = $1,000  8 
 (1  0.02) 
PV  $1,000 (0.233)
PV  $233

5-16. FVn  PV (1  i)n

I  (FVn/PV)1/n  1
I  ($12,000/$4,510)1/7  1
I  0.15 or 15%

 1 
5-17. (a) PV = FVn  n 
 (1  i ) 
PV  $1,000/(1.10)30
PV  $57.31
(b) FVn  PV (1  i)n
I  (FVn/PV)1/n 1
I  ($1000/$365)1/30  1
I  0.0342 or 3.42%

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120  Titman/Keown/Martin  Financial Management, Thirteenth Edition

5-18. FVn  PV (1  i)n

N  ln (FVn/PV)/ln (1 + i)
N  ln (330,000/45,530)/ln (1.045)
N  45 years

 1 
5-19. PV  FVn  n 
 (1  i ) 
PV  $398,930/(1.07)28
PV  $59,999.95

5-20. FVn  PV (1  i)n

I  (FVn/PV)1/n 1
I  ($5,200/$7,600)1/7  1
I  − 0.0528 or 5.28%

5-21. (a) FVn  PV (1  i)n

I  (FVn/PV)1/n  1
I  ($20,000/$900)1/30  1
I  0.1089 or 10.89%
(b) FVn  PV (1  i)n
I  (FVn/PV)1/n  1
I  ($3500/$900)1/10  1
I  0.1455 or 14.55%
(c) FVn  PV (1  i)n
I  (FVn/PV)1/n  1
I  ($20,000/$3,500)1/20  1
I  0.0911 or 9.11%

5-22. FVn  PV (1 + i)n

I  (FVn/PV)1/n  1
I  ($1079.50/$500)1/10  1
Thus, I  0.080 or 8.0%

5-23. FVn  PV (1  i)n

I  (FVn/PV)1/n  1
I  (2376.5/700)1/10  1
Thus, I  0.130 or 13.0%

5-24. FVn  PV (1  i)n

N  ln (FVn/PV)/ln (1  i)
Annual rate  16% with semiannual compounding
Periodic rate  (16%/2)  8%
N  ln (4/1)/ln (1.08)
N  18.01 semiannual periods  9.00 years

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 Solutions to End-of-Chapter Problems—Chapter 5 121
5-25. FVn  PV (1  i) n

N  ln (FVn/PV)/ln (1  i)
Annual Rate = 10% with semiannual compounding
Periodic Rate  (10%/2)  5%
N  ln (7/1)/ln (1.05)
N  39.88 semiannual periods  19.94 years

5-26. I  (FVn/PV)1/n  1
I  (27,027/10,000)1/5  1
Thus, I  0.22 or 22%

5-27. I  (FVn/PV)1/n  1
I  (37,313/15,000)1/5  1
Thus, I  0.20 or 20%
 1 
5-28. PV  FVn  n 
 (1  i ) 
PV  $300,000/(1.11)13
PV  $77,254.28
The better choice is the $100,000 today.

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122  Titman/Keown/Martin  Financial Management, Thirteenth Edition

 1 
5-29. PV = FVn  n 
 (1  i ) 

For $10,000 12 years from now:

PV  $10,000/(1.11)12
PV  $2,858.41
For $25,000 25 years from now:
PV  $25,000/(1.11)25
PV  $1,840.20
Of the choices of $1,000 today vs. $10,000 12 years from now (PV  $2,858.40) vs. $25,000 25
years from now (PV  $1,840.20), the best choice is $10,000 in 12 years.

5-30. FVn = PV (1  i)n

I  (FVn/PV)1/n  1
I  ($14,500/$0.12)1/53  1
I  0.2471 or 24.71%
or solve with financial calculator:
N  53

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 Solutions to End-of-Chapter Problems—Chapter 5 123
CPT I/Y  24.71%
PV   0.12
PMT 0
FV  14,500

5-31. FVn  PV (1  i)n

I  (FVn/PV)1/n  1
I  ($10,000/$0.12)1/53  1
I  0.2384 or 23.84%
or solve with financial calculator:
N  53
CPT I/Y  23.84%
PV   0.12
PMT 0
FV  10,000

5-32. N = 25
CPT I/Y = 8.18%
PV  − $35,000
PMT 0
FV  $250,000

5-33. interest rate (I)  8%

number of periods (N) 7
payment (PMT)  $0
present value (PV)  $900
type (0  at end of period)  0
Future value  $1,542.44
Excel formula:  FV(rate, number of periods, payment, present value, type)
 FV(0.08, 7, 0, 900, 0)
 $1,542.44
Notice that present value ($900) was entered as a negative value in the Excel formula.

5-34. number of periods (N)  20

payment (PMT)  $0
present value (PV)  $30,000
future value (FV)  $250,000
type (0  at end of period)  0
interest rate (I)  11.18%
Excel formula:  RATE(number of periods, payment, present value, future value, type)
 RATE(20,0, 30000,250000,0)
 0.1118  11.18%
Notice that present value ($30,000) was entered as a negative value in the Excel formula.

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124  Titman/Keown/Martin  Financial Management, Thirteenth Edition
5-35. EAR  (1  i/m)mn  1
EAR  (1  0.12/12) 12  1
EAR  0.127 or 12.7%
The loan at 12% compounded monthly is more attractive than the 13% loan compounded annually.

5-36. EAR  (1  i/m)mn  1

EAR  (1  0.24/12)12  1
EAR  0.268 or 26.8%
The loan at 26% compounded annually is more attractive.

5-37. Since the first part of this problem involves daily compounding we must first, make P/Y  365.
Then, N becomes the number of days in a year,
N  365
I/Y  (4.95/365) = 0.01356
PV  100
PMT 0
CPT FV  $105.07 or 5.07%
Now let’s look at monthly compounding; we’ll see what $100 will grow to at the end of a year.
First, we make P/Y  12.
N  12
I/Y  (5.0/12) = 0.4167
PV  100
PMT 0
CPT FV  $105.116 or 5.116%
An alternative approach would be to use the EAR for both CDs.
EAR  (1  i/m)mn  1
EAR  (1  (0.0495/365))365  1
EAR  5.07%
EAR  (1  i/m)mn  1
EAR  (1  (0.05/12))12  1
EAR  5.116%
The certificate with monthly compounding has the better rate.

5-38. EAR  (1  i/m)mn  1

EAR  (1  (0.078/12))12  1
EAR  8.08%
So, the better deposit rate is at Burns Bank (8.08% vs. 8.00%)

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 Solutions to End-of-Chapter Problems—Chapter 5 125

5-39. EAR  (1  APR/m)m  1

EAR  (1  0.10)365/10  1
EAR  (1.10)36.5  1
EAR  32.4215  1
EAR  31.4215 or 3,142.15%
Note: 10% is the periodic rate for 10 days.

5-40. EAR  (1  APR/m)m  1

EAR  (1  0.15)26  1
EAR  (1.15)26  1
EAR  37.8568  1
EAR  36.8568 or 3,685.68%
Note: 15% is the periodic rate for 2 weeks.

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