TIME VALUE OF MONEY

1. D.S is trying to sell a piece of land in Alaska. Yesterday, he was offered $10.000 for the
property. He was about to ready to accept the offer when other investor offered him $11,424.
However this second payment was to be paid a year from now. If the insured interest rate in
bank was %12 , should he accept the first or the second offer?
2. Assume that you have two alternatives, The first alternative is investing in a piece of land that
costs $85,000. The land will be $91,000 next year (certain). Given the interest rate of %10 in
the bank, should you make the investment in land?
3. Professional ArtWorks, Inc. is a firm that speculates in modern paintings. The manager is
thinking of buying an original Picasso for $400.000 with an intention of selling it at the end of
1 year. The manager expects that the painting will be worth $480,000 in one year. Suppose the
guaranteed interest rate by banks is %10. Should the firm purchase the piece of art?
4. S.P has put $500 in a savings account. The account earns %7 compounded annually. How
much will S.P have at the end of 3 years?
5. Michael Duffy, who recently won $10.000 in the lottery wants to buy a car in 5 years. Michael
estimates the car will cost $16,105 at that time. What interest must he earn to be able to afford
the car?
6. Bernard Dumas will receive $10,000 3 years from now. Bernard can earn %8 on his
investments. What is the present value of his future cash flow?
7. A customer of Chaffin Corp. wants to buy a tugboat today. Rather than paying immediately,
he will pay $50.000 in 3 years. It will cost the Chaffin Corp.$38,610 to build the Tugboat
immediately. By charging what interest rate would the Chaffkin Corp. Neither gain nor lose
on the sale?
8. Dennis Draper has won the state lottary and will receive the following cash flows over the
next 2 years.
Year Cash Flow
1 $2000
2 $5000
Mr. Draper can currently earn %6 in his saving account. What is the present value of cash
flows?
9. A bank pays a %10 interest rate “compounded semiannually”. What will the $1000 deposit be
worth at the end of the year?
10. What is the end of year wealth if Jane Christine receives a stated annual interest rate of %24
compounded monthly on a $1 investment?
11. Harry D. Ang. is investing $5000 at a stated annual interest rate of 12 percent per year,
compounded quarterly for 5 years. What is the wealth at the end of 5 years?
12. Mr. Young has just won the state lottery, paying $50,000 a year for 20 years. He is to receive
his first payment a year from now. If the interest rate is 8 percent. What is the true value of
this lottery?
13. Danielle Caravello will receive a 4 year annuity of $500 per year beginning at date 6. What is
the present value of her annuity, if the interest rate is 10 percent?
14. In question 12 assume that the first payment occurs immediately. Find the present value.
15. Harold and Helen Nash are saving for the college education of their newborn daughter. The
Nashes estimate that college expenses will run $30,000 per year, when their daughter reaches
college in 18 years. How much money must they deposit in the bankeach year so that their
daughter will be completely supported by 4 years of college?