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Time Value of Money

4-1 If you deposit $10,000 in a bank that pays 10% interest annually, how much will be in your account after 5 years.

4-2 What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?

4-3 Your parents will retire in 18 years. They currently have $250,000 and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds?

4-4 If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

4-5 You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal?

4-6 What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value be?

4-7 An investment will pay $100 at the end of each of next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If the other investments of equal risk earn 8% annually, what is this investment's present value? Its future value?


Solution Preview

Please refer attached file for better clarity of functions in MS Excel.


Present Value of deposit=PV=($10,000) Assume cash outflow
Amount of periodic payment=PMT=0
Interest Rate=Rate=10%
Number of periods=NPER=5
Future Value=FV=?
We can use FV function in MS Excel to get this value
Future Value=FV=$16,105.10


Future Value of deposit=FV=$5,000
Amount of periodic payment=PMT=0
Interest Rate=Rate=7%
Number of periods=NPER=20
Present Value=PV=?
We can use PV function in MS Excel to get this value
Present Value=PV=($1,292.10)


Present Value of ...

Solution Summary

There are seven basic time value of money problems. Each problem is solved by using functions in MS Excel.