UNIVERSITY OF THE IMMACULATE CONCEPTION

Bonifacio St., Davao City

MASTERS IN BUSINESS ADMINISTRATION

Financial Management

NINIO BIONG MANIALAG VINCENT RAY BORON, CPA, MBA

Student Professor

Problem 5-1. Future Value: If you deposit $2,000 in a bank account that pays 6% interest annually, how
much will be in your account after 5 years?
Answer:

Given:
Principal = $2,000
Interest = 6%
Time = 5 years
Compounding periods = Annually
Required: Future value (FV) of investment

Formula:
FV = P(1+r/n) t x n

Where:
FV = future value
P = principal
r = nominal interest rate
n = number of compounding periods per year
t = number of years

FV = P(1+r/n) t x n
= $2,000 (1+0.06/1) 5 x 1
= $2,000 (1.06) 5
FV = $2,676.45

5-2. PRESENT VALUE. What is the present value of a security that will pay $29,000 in 20 years if
securities of equal risk pay 5% annually?

Given:
Future Value (FV) = $29,000
Interest rate (r) = 5%
Time in years = 20 years
Compounding periods (n) = Annually

Required: Present Value (PV) of investment

Formula:

PV = FV
(1+r/n) t x n

= $29,000
(1+0.5/1) 20 x 1

= $29,000
(1.05) 20
PV = $10,929.80

5-6. FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE. What’s the future value of a 5%, 5-year ordinary
annuity that pays $800 each year? If this was an annuity due, what would its future value be?

Answer:

Given:
Annuity payments (PMT) = $800
Interest rate (r) = 5%
Time in year (t) = 5 years
Compounding period (n) = Annually

Required: Future value (FV) of investment

FV = PMT (1+r/n) (t) (n) – 1

r/n

= $800 (1+0.5/1) (5) (1) – 1

0.5/1
= $800 1.2762816 – 1
0.05

= $800 0.2762816
0.05
= $800 (5.525632)
FV = $4,420.51

If the annuity is an annuity due, meaning the payments start begin at the beginning of each period, then
simplify multiply the future value of ordinary annuity (computed above) by (1+r/n).

= FV of OA x (1+r/n)
= $4,420.51 x (1+05/1)
= $4,420.51 x 1.05
= $4,641.54 future value of annuity due
5-7. PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM. An investment will pay $150 at the end
of each of the next 3 years, $250 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of
Year 6. If other investments of equal risk earn 11% annually, what is its present value? Its future value?

Answer:

Discount each cash flow to period 0, then find the sum if the discounted cash flows to find the present
value.

Period Cash Flow ÷ (Factor ^ Periods) = Periods 0 value

Year 1 $150 ÷ (1.11 ^ 1) = $135.14
Year 2 $150 ÷ (1.11 ^ 2) = $121.74
Year 3 $150 ÷ (1.11 ^ 3) = $109.68
Year 4 $250 ÷ (1.11 ^ 4) = $164.68
Year 5 $300 ÷ (1.11 ^ 5) = $178.04
Year 6 $500 ÷ (1.11 ^ 6) = $267.32
Total = $976.60

Present value of the cash flow is $976.60

Grow each cash flow to year 6, then the sum of the future value of the cash flows.

Period Cash Flow ÷ (Factor ^ Periods) = Periods 0 value

Year 1 $150 ÷ (1.11 ^ 5) = $252.76
Year 2 $150 ÷ (1.11 ^ 4) = $227.71
Year 3 $150 ÷ (1.11 ^ 3) = $205.14
Year 4 $250 ÷ (1.11 ^ 2) = $308.03
Year 5 $300 ÷ (1.11 ^ 1) = $333.00
Year 6 $500 ÷ (1.11 ^ 0) = $500.00
Total = $1,826.64

The future value of the cash flows at the end of year 6 is $1,826.64