1 Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for five

years. The CD will pay interest of 9 percent. What is the future value of Amit’s
investment?

Solution:
Present value of the investment = PV = $10,000
Interest rate = i = 9%
Number of years = n = 5.

0 1 2 3 4 5
├───┼───┼───┼────┼───┤
-$10,000 FV5=?

2 Megan Gaumer expects to need $50,000 as a down payment on a house in six years.
How much does she need to invest today in an account paying 7.25 percent?

Solution:
Amount Megan will need in six years = FV6 = $50,000
Number of years = n = 6
Interest rate on investment = i = 7.25%
Amount needed to be invested now = PV = ?

0 1 2 3 4 5 6 Year
├───┼───┼───┼────┼───┼───┤
PV = ? FV6 = $50,000

3 Kelly Martin has $10,000 that she can deposit into a savings account for five years.
Bank A pays compounds interest annually, Bank B twice a year, and Bank C
quarterly. Each bank has a stated interest rate of 4 percent. What amount would Kelly
have at the end of the fifth year if she left all the interest paid on the deposit in each
bank?
Solution:
Present value = PV = $10,000
Number of years = n = 5
Interest rate = i = 4%
Compound period m:
A=1
B=2
C=4
Amount at the end of 5 years = FV5 = ?

0 1 2 3 4 5 Year
├───┼───┼───┼────┼───┤
-$10,000 FV5 = ?

4 You have an opportunity to invest $2,500 today and receive $3,000 in three years.
What will be the return on your investment?

Solution:
Your investment today = PV = $2,500
Amount to be received = FV3= $3,000
Time of investment = n = 3
Return on the investment = i = ?

0 1 2 3 Year
├───┼────┼───┤
-$2,500 $3,000

5 Emily Smith deposits $1,200 in her bank today. If the bank pays 4 percent simple
interest, how much money will she have at the end of five years? What if the bank
pays compound interest? How much of the earnings will be interest on interest?
Solution:
Deposit today = PV = $1,200
Interest rate = i = 4%
Number of years = n = 5
Amount to be received back = FV5 = ?

0 1 2 3 4 5 Year
├───┼───┼───┼────┼───┤
-$1.200 FV5 = ?

6 Future value: Chuck Tomkovick is planning to invest $25,000 today in a mutual

fund that will provide a return of 8 percent each year. What will be the value of the
investment in 10 years?

Solution:
0 10 years
├────────────────────┤
PV = -$25,000 FV10 = ?

Amount invested today = PV = $25,000

Return expected from investment = i = 8%
Duration of investment = n = 10 years
Value of investment after 10 years = FV10

7 Future value: Ted Rogers is investing $7,500 in a bank CD that pays a 6 percent
annual interest. How much will the CD be worth at the end of five years?

Solution:
0 5 years
├────────────────────┤
PV = $7,500 FV5 = ?
 Amount invested today = PV = $7,500
Return expected from investment = i = 6%
Duration of investment = n = 5 years
Value of investment after 5 years = FV5

8 Future value: Your aunt is planning to invest in a bank deposit that will pay 7.5
percent interest semiannually. If she has $5,000 to invest, how much will she have at
the end of four years?

Solution:
0 4 years
├────────────────────┤
PV = $5,000 FV4 = ?
Amount invested today = PV = $5,000
Return expected from investment = i = 7.5%
Duration of investment = n = 4 years
Frequency of compounding = m = 2
Value of investment after 4 years = FV4

9 Future value: Kate Eden received a graduation present of $2,000 that she is planning
on investing in a mutual fund that earns 8.5 percent each year. How much money can
she collect in three years?

Solution:
0 3 years
├────────────────────┤
PV = $2,000 FV3 = ?
Amount Kate invested today = PV = $2,000
Return expected from investment = i = 8.5%
Duration of investment = n = 3 years
Value of investment after 3 years = FV3
10 Future value: Your bank pays 5 percent interest semiannually on your savings
account. You don’t expect the current balance of $2,700 to change over the next four
years. How much money can you expect to have at the end of this period?

Solution:
0 4 years
├────────────────────┤
PV = -$2,700 FV4 = ?
Amount invested today = PV = $2,700
Return expected from investment = i = 5%
Duration of investment = n = 4 years
Frequency of compounding = m = 2
Value of investment after 4 years = FV4

11 Future value: Your birthday is coming up, and instead of other presents, your parents
promised to give you $1,000 in cash. Since you have a part time job and thus don’t
need the cash immediately, you decide to invest the money in a bank CD that pays 5.2
percent quarterly for the next two years. How much money can you expect to gain in
this period of time?

Solution:
0 2 years
├────────────────────┤
PV = -$1,000 FV2 = ?
Amount invested today = PV = $1,000
Return expected from investment = i = 5.2%
Duration of investment = n = 2 years
Frequency of compounding = m = 4
Value of investment after 2 years = FV2
12 Multiple compounding periods: Find the future value of an investment of $100,000
made today for five years and paying 8.75 percent for the following compounding
periods:
a. Quarterly
b. Monthly
c. Daily
d. Continuous

Solution:
0 5 years
├────────────────────┤
PV = -$100,000 FV5 = ?

Amount invested today = PV = $100,000

Return expected from investment = i = 8.75%
Duration of investment = n = 5 years

13 Present value: Maria Addai has been offered a future payment of $750 two years
from now. If she can earn 6.5 percent compounded annually on her investment, what
should she pay for this investment today?

Solution:
0 2 years
├────────────────────┤
PV = ? FV2 = $750

Value of investment after 2 years = FV2 = $750

Return expected from investment = i = 6.5%
Duration of investment = n = 2 years
Amount to be invested today = PV
14. Present value: Your brother has asked you for a loan and has promised to pay back
$7,750 at the end of three years. If you normally invest to earn 6 percent per year,
how much will you be willing to lend to your brother?

Solution:
0 3 years
├────────────────────┤
PV = ? FV3 = $7,750

Loan repayment amount after 3 years = FV3 = $7,750

Return expected from investment = i = 6%
Duration of investment = n = 3 years
Amount to be invested today = PV

15 Present value: Tracy Chapman is saving to buy a house in five years. She plans to
put down 20 percent down at that time, and she believes that she will need $35,000
for the down payment. If Tracy can invest in a fund that pays 9.25 percent annually,
how much will she need to invest today?

Solution:

0 5 years
├────────────────────┤
PV = ? FV5 = $35,000

Amount needed for down payment after 5 years = FV5 = $35,000

Return expected from investment = i = 9.25%
Duration of investment = n = 5 years
Amount to be invested today = PV
16 Present value: You want to buy some bonds that will have a value of $1,000 at the
end of seven years. The bonds pay 4.5 percent interest annually. How much should
you pay for them today?

Solution:
0 7 years
├────────────────────┤
PV = ? FV7 = $1,000

Face value of bond at maturity = FV7 = $1,000

Appropriate discount rate = i = 4.5%
Number of years to maturity = n = 7 years.
Present value of bond = PV

17 Present value: Elizabeth Sweeney wants to accumulate $12,000 by the end of 12

years. If the annual interest rate is 7 percent, how much will she have to invest today
to achieve her goal?

Solution:
0 12 years
├────────────────────┤
PV = ? FV12 = $12,000

Amount Ms. Sweeney wants at end of 12 years = FV12 = $12,000

Interest rate on investment = i = 7%
Duration of investment = n = 12 years.
Present value of investment = PV

18 Interest rate: You are in desperate need of cash and turn to your uncle who has
offered to lend you some money. You decide to borrow $1,300 and agree to pay back
$1,500 in two years. Alternatively, you could borrow from your bank that is charging
6.5 percent interest annually. Should you go with your uncle or the bank?
Solution:
0 2 years
├────────────────────┤
PV = -$1,300 FV2 = $1,500

Amount to be borrowed = PV = $1,300

Amount to be paid back after 2 years = FV2 = $1,500
Interest rate on investment = i = ?
Duration of investment = n = 2 years.
Present value of investment = PV

19 Number of periods: You invest $150 in a mutual fund today that pays 9 percent
interest annually. How long will it take to double your money?

20. Kronka, Inc., is expecting cash flows of $13,000, $11,500, $12,750, and $9,635 over
the next four years. What is the present value of these cash flows if the appropriate
discount rate is 8 percent?

Solution:
The time line for the cash flows and their present value is as follows:
0 8% 1 2 3 4 Year
├─────────┼─────────┼─────────┼─────────┤
$13,000 $11,500 $12,750 $9,635

21 Your grandfather has agreed to deposit a certain amount of money each year into an
account paying 7.25 percent annually to help you go to graduate school. Starting next
year, and for the following four years, he plans to deposit $2,250, $8,150, $7,675,
$6,125, and $12,345 into the account. How much will you have at the end of the five
years?

Solution:
The time line for the cash flows and their future value is as follows:
22 Mike White is planning to save up for a trip to Europe in three years. He will need
$7,500 when he is ready to make the trip. He plans to invest the same amount at the
end of each of the next three years in an account paying 6 percent. What is the amount
he will have to save every year to reach his goal of $7,500 in three years?

Solution:
Amount Mike White will need in three years = FVA3 = $7,500
Number of years = n = 3
Interest rate on investment =. i = 6.0%
Amount needed to be invested every year = PMT = ?

0 6% 1 2 3 Year
├─────────┼──────┼───────┤
CF=? CF=? CF=? FVA3 = $7,500

23 Becky Scholes has $150,000 to invest. She wants to be able to withdraw $12,500
every year forever without using up any of her principal. What interest rate would her
investment have to earn in order for her to be able to so?

Solution:
Present value of investment = $150,000
Amount needed annually = $12,500
This is a perpetuity!

24 Dynamo Corp. is expecting annual payments of $34,225 for the next seven years from
a customer. What is the present value of this annuity if the discount rate is 8.5
percent?

Solution:
0 8.5% 1 2 3 4 5 6 7
├───┼───┼────┼───┼───┼───┼───┤
PVA= ? $34,225 $34,225 $34,225 $34,225 $34,225 $34,225 $34,225
25. Future value with multiple cash flows: Konerko, Inc., expects to earn cash flows of
$13,227, $15,611, $18,970, and $19,114 over the next four years. If the company uses
an 8 percent discount rate, what is the future value of these cash flows at the end of
year 4?

Solution:
0 8% 1 2 3 4
├───────┼────────┼───────┼────────┤
$13,227 $15,611 $18,970 $19,114

26 Future value with multiple cash flows: Ben Woolmer has an investment that will
pay him the following cash flows over the next five years: $2,350, $2,725, $3,128,
$3,366, and $3,695. If his investments typically earn 7.65 percent, what is the future
value of the investment’s cash flows at the end of five years?

Solution:
0 7.65% 1 2 3 4 5
Year
├───────┼────────┼───────┼────────┼───────┤
$2,350 $2,725 $3,128 $3,366 $3,695

27 Future value with multiple cash flows: You are a freshman in college and are
planning a trip to Europe when you graduate from college at the end of four years.
You plan to save the following amounts starting today: $625, $700, $700, and $750. If
the account pays 5.75 percent annually, how much will you have at the end of four
years?

Solution:
0 5.75% 1 2 3 4 Year
├───────┼────────┼───────┼────────┤
$625 $700 $700 $750
28 Present value with multiple cash flows: Saul Cervantes has just purchased some
equipment for his landscaping business. For this equipment, he must pay the
following amounts at the end of each of the next five years: $10,450, $8,500, $9,675,
$12,500, and $11,635. If the appropriate discount rate is of 10.875 percent, what is the
cost of the equipment Saul purchased today?

Solution:
0 10.875% 1 2 3 4 5
Year
├───────┼────────┼───────┼────────┼───────┤
$10,450 $8,500 $9,675 $12,500 $11,635

29 Future value of an ordinary annuity: Cecelia Thomas is a sales executive at a

Baltimore firm. She is 25 years old and plans to invest $3,000 every year in an IRA
account, beginning at the end of this year until she turns 65 years old. If the IRA
investment will earn 9.75 percent annually, how much will she have in 40 years when
she turns 65 years old?

Solution:
0 9.75% 1 2 3 39 40
Year
├───────┼────────┼───────┼………………┼───────┤
$3,000 $3,000 $3,000 $3,000 $3,000

Annual investment = PMT = $3,000

No. of payments = n = 40
Investment rate of return = 9.75%
Future value of investment = FVA40
30 Future value of an annuity. Refer to Problem 29. If Cecelia Thomas starts saving at
the beginning of each year, how much will she have at age 65?

Solution:
0 9.75% 1 2 3 39 40
Year
├───────┼────────┼───────┼………………┼───────┤
$3,000 $3,000 $3,000 $3,000 $3,000

Annual investment = PMT = $3,000

No. of payments = n = 40
Type of annuity = Annuity due
Investment rate of return = 9.75%
Future value of investment = FVA40