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Time Value of Money Over 10 Years

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1. Calculate the future value of $2000 in
a) 5 years at an interest rate of 5% per year.
b) 10 years at an interest rate of 5% per year.
c) 5 years at an interest rate of 10% per year.
d) Why is the amount of interest earned in pat (a) less than half the amount of interest earned in part (b)?

2. You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 five years after the date of your retirement. Which alternative should you choose if the interest rate is
a) 0% per year?
b) 8% per year?
c) 20% per year?

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Solution Summary

There are two problems. Solutions to these problems depict the steps to calculate future and present value of a single cash flow.

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Solution:

1. Calculate the future value of $2000 in

a) 5 years at an interest rate of 5% per year.
Present Value=PV=$2000
Number of periods=n=5
Interest Rate=r=5%
Future Value=FV=PV*(1+r)^n=2000*(1+5%)^5=$2552.56

b) 10 years at an interest rate of 5% per year.
Present Value=PV=$2000
Number of periods=n=10
Interest Rate=r=5%
Future Value=FV=PV*(1+r)^n=2000*(1+5%)^10=$3257.79

c) 5 years at an interest rate of 10% per year.
Present Value=PV=$2000
Number of periods=n=5
Interest Rate=r=10%
Future ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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