Time Value of Money: PV and FV for Single Cash Flows
ASSIGNMENT 1
Time Value of Money: PV & FV for Single Cash Flows
1.- Is this true or false? $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest. (Answer: False)
2.- Megan wants to buy a designer handbag and plans to earn the money babysitting. Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How much babysitting money
(to the nearest whole dollar) will she need to earn today to buy the bag for $400 one year from now?
(Answer: $377)
3.- Jeff has $1,000 that he invests in a safe financial instrument expected to return 3% annually. Marge has $500 and invests in a more risky venture that is expected to return 7% annually. Who has more after
20 years? And how much does he/she have in FV terms? (Answer: Marge; $1,935)
4,- Don has just received a cash gift of $50,000 from his rich eccentric uncle. He wants to set it aside to pay for his daughter Cynthia’s college education. Cynthia will begin college in 10 years and Don’s financial advisor says that she can earn 7% interest on an investment in a special college fund. How much will Don have in the fund when Cynthia begins college? (Answer: Marge; $98,358)
5.- Bridgette’s grandparents opened a savings account for her and placed $500 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $150. How much less will the account be worth in 8 years if she buys the karaoke machine now versus leaving the account untouched? (Answer: Marge; $198)
6.- Joe is getting ready to buy a car. He has $20,000 in investments earning 4.9% annually. The car also costs $20,000. If he doesn’t pay cash for the car, Joe can get a loan at 2.9% interest for 5 years. The loan is structured so that Joe pays one balloon payment at the end of 5 years. The balloon payment includes the principal plus all interest accrued over 5 years. If Joe
Time Value of Money: PV & FV for Single Cash Flows
1.- Is this true or false? $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest. (Answer: False)
2.- Megan wants to buy a designer handbag and plans to earn the money babysitting. Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How much babysitting money
(to the nearest whole dollar) will she need to earn today to buy the bag for $400 one year from now?
(Answer: $377)
3.- Jeff has $1,000 that he invests in a safe financial instrument expected to return 3% annually. Marge has $500 and invests in a more risky venture that is expected to return 7% annually. Who has more after
20 years? And how much does he/she have in FV terms? (Answer: Marge; $1,935)
4,- Don has just received a cash gift of $50,000 from his rich eccentric uncle. He wants to set it aside to pay for his daughter Cynthia’s college education. Cynthia will begin college in 10 years and Don’s financial advisor says that she can earn 7% interest on an investment in a special college fund. How much will Don have in the fund when Cynthia begins college? (Answer: Marge; $98,358)
5.- Bridgette’s grandparents opened a savings account for her and placed $500 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $150. How much less will the account be worth in 8 years if she buys the karaoke machine now versus leaving the account untouched? (Answer: Marge; $198)
6.- Joe is getting ready to buy a car. He has $20,000 in investments earning 4.9% annually. The car also costs $20,000. If he doesn’t pay cash for the car, Joe can get a loan at 2.9% interest for 5 years. The loan is structured so that Joe pays one balloon payment at the end of 5 years. The balloon payment includes the principal plus all interest accrued over 5 years. If Joe