MBA 614 Time Value of Money (TVM) Exercises

(Compound and Simple Interest)

1. You put $1,000 in a CD that pays 8% annually. How much is it worth at the end of 5
years?
2. What if only simple interest had been paid?

(Time of investment)
3. You currently have $1000. You need $6000 for a down payment on a house. If the
annual interest rate is 15% how many years do you have to wait (Assume no further
direct cash contributions to the account.) What if simple interest had been paid?

(Finding the interest rate)

4. Suppose you have $500 today. You want to invest the money for 4 years and buy a car
with the proceeds. You would like to have $1000 to spend at that time. What interest
rate does your investment need to earn to allow this?

(Multiple cash flows)

5. Suppose you make the following deposits to an account that pays 8% annually. The
deposits are made at the end of the year.
C1 $800
C2 $1000
C3 $400
C4 $500
How much is this account worth at the end of year 4?
Suppose someone offered you the same stream of payment as above in exchange for
cash today. How much would you be willing to give them?

(Payments Due)
6. Suppose the deposits in the last example were made at the beginning of each year
instead of at the end of the year. Does the value change? By how much?

(Perpetuity)
7. Suppose that after you graduate you decide that finance was the best thing that has
ever happened in your lives and in a fit of collective glee your class decides to endow a
chair in the Finance Department. You want your endowment to provide $50,000
annually to whatever professor holds the chair. You want the chair to continue
indefinitely. If interest rates are 10%, how much money does your class need to raise
today for this worthy project?

Concordia University
John Molson School of Business
MBA 614 Time Value of Money (TVM) Exercises

(Annuity)
8. Suppose that instead of wanting to endow the chair in perpetuity you think finance is
only arbitrarily close to the greatest thing that ever happened to you and only want to
endow the chair for 20 years. If interest rates are 10%, how much money does your
class need to raise today for this somewhat less worthy project?

(Growing Perpetuity)
9. Suppose you change your mind again and get extremely generous. You want to fund
the chair in perpetuity and also give the lucky holder a 4% annual cost of living
adjustment. That is, you want the first check paid to be for $50,000 and all other
checks to grow at 4%. If interest rates are 10%, how much money does your class
need to raise today for this extremely worthy project?

(Growing Annuity)
10. You just graduated and landed a job that pays $65,000 a year. You expect your salary
to grow 5% annually until you retire 30 years from today. To make this simple,
assume you get paid once a year at the end of the year. If the interest rate is 15%,
what is the present value of your job?

(Compounding intervals)
11. How much will you end up with in four years (i.e. what is P4, the future value at t = 4)
if you invest $200 in an account with a quoted annual rate (APR) of 12% and monthly
compounding? Annual compounding?

(Delayed Annuity)
12. You will receive a 4 year annuity of $500 per year beginning in year 6. Payments are
at the end of year. If r = 10%, what is the present value of this annuity?

(Infrequent Annuity)
13. Suppose you have an annuity that pays $450 at the end of every two year period (i.e.,
at the end of year 2, 4, 6 and so on) over the next 20 years (so you get a total of 10
checks). If r = 6%, what is the present value of this stream?

(Equating the value of two Annuities)

14. At your daughter's 6th birthday party she tells you that she wants to go to Princeton.
You know it will cost you $30,000 per year for her to attend this 4 year institution.
You decide to start putting money into an account that pays 14% annually. You will
begin to make deposits on her next birthday and continue this practice until her 17th
birthday. She starts college (and the first tuition payment is payable) on her 18th
birthday. The second is payable on her 19th birthday and so on. How large are the
annual deposits you make to this account?

Concordia University
John Molson School of Business