Solutions Manual

CHAPTER 10

THE TIME VALUE OF MONEY

SUGGESTED ANSWERS TO THE REVIEW QUESTIONS AND PROBLEMS

I. Questions

1. The future value represents the expected worth of a single amount,

whereas the present value represents the current worth.

FVn = PV (1 + i) n - Future Value

PV = FVn 1 - Present Value

(1 + i) n
2. The present value of a single amount is the discounted value for one
future payment, whereas the present value of an annuity represents the
discounted value of a series of consecutive payments of equal amount.

3. Money has a time value because funds received today can be reinvested
to reach a greater value in the future. A person would rather receive 1
today than 1 in ten years, because a peso invested today, invested at 6
percent is worth 1.791 after ten years.

4. Inflation makes a peso today worth more than a peso in the future.
Because inflation tends to erode the purchasing power of money, funds
received today will be worth more than the same amount received in the
future.

5. The greater the number of compounding periods, the larger the future
value. The investor should choose daily compounding over monthly or
quarterly.

6. Different financial applications of the time value of money are:

a) Equipment purchase or new product decision.

b) Present value of a contract providing future payments.
c) Future worth of an investment.
d) Regular payment necessary to provide a future sum.
e) Regular payment necessary to amortize a loan.
II. Problems

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Chapter 10 The Time Value of Money

Problem 1 (Use Table 2)

PV = FVn (PVIFi,n)

a) 8,000 x .558 = 4,464

b) 16,000 x .567 = 9,072
c) 25,000 x .315 = 7,875
d) 1,000 x .001 = 1

Problem 2 (Use Table 1)

FVn = PV (FVIFi,n)

a) 12,000 x 1.501 = 18,012

b) 12,000 x 5.474 = 65,688
c) 12,000 x 10.835 = 130,020
d) 12,000 x 11.467 = 137,604 (5%, 50 periods)

Problem 3 (Use Table 2 and Table 4)

PV = FVn (PVIFi,n)

a) 12,000 x .507 = 6,084

b) 15,000 x .315 = 4,725

PVOA n = A (PVIFA i,n)

c) 5,000 x 6.710 = 33,550

d) 40,000 x 17.159 = 686,360

Problem 4 (Use Table 3)

FVOAn = A (FVIFAi,n)

a) 8,000 x 9.20 = 73,600

b) 8,000 x 581.83 = 4,654,640

Problem 5 (Use Table 4)

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 The Time Value of Money Chapter 10

PVOA n = A (PVIFA i,n)

PVOA 14 = (6,500) x (8.244) = 53,586

Problem 6 (Use Table 2)

PV = FVn (PVIFi,n)

= (30,000) x (.593) = 17,790

Problem 7 (Use Table 4 and Table 2)

a. PVOA n = A (PVIFA i,n)

= (45,000) x (6.145) = 276,525

b. PV = FVn (PVIFi,n)

= (276,525) x (.826) = 228,410

Problem 8 (Use Table 2 and Table 3)

a. PV = FVn (PVIFi,n)

= (23,956) x (.544) = 13,032.06

b. A = FVOAn FVIFAi,n

= 23,956 11.978 = 2,000

Problem 9 (Use Table 3)

FVOAn = A (FVIFAi,n)

= (1,500) x (13.181) = 19,771.50

Problem 10 (Use Table 1)

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Chapter 10 The Time Value of Money

If the sum is doubling, then the tabular value must equal to 2. In Table 1,
looking down the 8% column, we find the factor closest to 2 (1.999) on the
9-year row. The factor closest to 3 (2.937) is on the 14-year row.

Problem 11 (Use Table 2)

PV = FVn (PVIFi,n)

a) PV = (5,000) (PVIF0.05,4) = (5,000) (0.823) = 4,115

b) PV = (5,000) (PVIF0.10,4) = (5,000) (0.683) = 3,415

c) PV = (5,000) (PVIF0.15,4) = (5,000) (0.572) = 2,860

Problem 12 (Use Table 2)

PV = FVn (PVIFi,n)

a) PV1 = (5,000) (PVIF0.20,1) = (5,000) (0.833) = 4,165.00

b) PV2 = (6,000) (PVIF0.20,2) = (6,000) (0.694) = 4,164.00

c) PV3 = (7,500) (PVIF0.20,3) = (7,500) (0.579) = 4,342.50

d) PV4 = (7,500) (PVIF0.20,4) = (7,500) (0.482) = 3,615.00

e) PV5 = (9,500) (PVIF0.20,5) = (9,500) (0.402) = 3,819.00

Total Present Value = 20,105.50

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 The Time Value of Money Chapter 10

Problem 13 (Use Table 4)

Rewrite the Equation PVOA n = A (PVIFA i,n) to solve for the interest rate.
Dividing both sides of the equation by A gives a new equation: PVIFA i,n =
PVOA n A. Now, solve the new equation as follows:

PVIFA i,6 = 20,000 5,142.71 = 3.889

Look up PVIFA of 3.889 for six years in Table 4 and the result is an interest
rate of 14 percent.

Problem 14 (Use the Equation: PV of a perpetuity = A i)

a) PV of a perpetuity = 500 0.05 = 10,000

b) PV of a perpetuity = 500 0.10 = 5,000

Problem 15 (Use Table 1)

The ending amount of 2,839 is divided by the beginning amount of 1,000

to produce a FVIF for ten years.

FVIFi,n = FVn PV

FVIFi,10 = 2,839 1,000 = 2.839

Look up the value of i for an FVIF of 2.839 in Table 1 for ten years and the
result is an annual compound growth rate of 11 percent.

III. Multiple Choice Questions

1. C 6. B 11. A
2. C 7. C 12. D
3. C 8. A 13. B
4. C 9. B 14. A
5. D 10. D 15. A

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