Time value of money
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1. In two to three paragraphs, explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class.
2. Calculate the future value of the following:
a. $500 if invested for five years at a 4% interest rate
b. $150 if invested for three years at a 9% interest rate
c. $9100 if invested for seven years at an 3% interest rate
d. $1000 if invested for ten years with a 0.5% interest rate
3. Calculate the present value of the following:
a. $7700 to be received three years from now with a 5% Interest rate
b. $1500 to be received five years from now with a 7% interest rate
c. $7200 to received two years from now with a 11% interest rate
d. $680,000 to be received eight years from now with a 9% interest rate.
4. Suppose you are to receive a stream of annual payments (also called an "annuity") of $3000 every year for three years starting this year. The interest rate is 3%. What is the present value of these three payments?
5. Suppose you are to receive a payment of $5000 every year for three years. You are depositing these payments in a bank account that pays 2% interest. Given these three payments and this interest rate, how much will be in your bank account in three years?
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This solution is comprised of a detailed explanation of time value of money.
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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