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# Time value of money problems

Time value of money exercises

1. What is the present value of the following series of cash flows discounted at 12 percent: \$40,000 now; \$50,000 at the end of the first year; \$0 at the end of year the second year; \$60,000 at the end of the third year; and \$70,000 at the end of the fourth year?

2. Assume an income-producing property is priced at \$5,000 and has the following income stream (year 1, \$1,000; year 2, -\$2,000; year 3, \$3,000; and year 4, \$3,000). Would an investor with a required rate of return of 15 percent be wise to invest at the current price?

3. Calculate the present value of the income stream given below assuming discount rates of 8 percent and 20 percent.

Year Income
1 \$3,000
2 \$4,000
3 \$6,000
4 \$1,000

4. Calculate the IRR and NPV for the following investment opportunities. Assume a 16 percent discount rate for the NPV calculations:

Year Project 1 Cash Flow Project 2 Cash Flow
0 -\$10,000 -\$10,000
1 1,000 1,000
2 2,000 12,000
3 12,000 1,800

#### Solution Preview

Use BAII Plus by Texas Instruments

Time value of money exercises

1. What is the present value of the following series of cash flows discounted at 12 percent: \$40,000 now; \$50,000 at the end of the first year; \$0 at the end of year the second year; \$60,000 at the end of the third year; and \$70,000 at the end of the fourth year?
Time line 0 1 2 3 4
Cash 40,000 50,000 0 60,000 70,000

To Press
Enter interest rate per cash flow period 12 I/Y
Enter 1st cash flow 50000 +/- FV
Enter 1st cash flow period 1 N
Compute PV of 1st cash flow CPT PV 44,642.86
Store in M1 STO 1
Enter 2nd cash flow 0 +/- FV
Enter 2nd cash flow period 2 N
Compute PV of 2nd cash flow CPT PV 0
Sum to memory STO + 1
Enter 3rd cash flow 60000 +/- FV
Enter 3rd cash flow period 3 N
Compute PV of 3rd cash flow CPT PV 42,706.81
Sum to memory STO + 1
Enter 4th cash flow 70000 +/- FV
Enter 4th cash flow period 4 N
Compute PV of 4th cash flow CPT PV 44,486.27
Sum to memory STO + 1
Recall total PV RCL 1
Add 40,000 now + 40000 = 171,835.94

2. Assume an income-producing property is priced at \$5,000 and has the following income stream (year 1, \$1,000; year 2, -\$2,000; year 3, \$3,000; and year 4, \$3,000). Would an investor with a required rate of return of 15 percent be wise to invest at the current ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer what is the present value of the following series of cash flows discounted at 12 percent: \$40,000 now; \$50,000 at the end of the first year; \$0 at the end of year the second year; \$60,000 at the end of the third year; and \$70,000 at the end of the fourth year, would an investor with a required rate of return of 15 percent be wise to invest at the current price, calculate the present value of the income stream given assuming discount rates of 8 percent and 20 percent, and calculate the IRR and NPV for the investment opportunities.

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