TUTORIAL – TIME VALUE OF MONEY

1) Bob received $12,345 for his services as financial consultant to the mayor’s office of his
hometown of Springfield. Bob says that his consulting work was his civic duty and that
he should not receive any compensation. So, he has invested his paycheck into an account
paying 3.98% annual interest and left the account in his will to the city of Springfield on
the condition that the city could not collect any money from the account for 200 years.
How much money will the city receive from Bob’s generosity in 200 years?

2) You have just introduced “must-have” headphones for the iPod. Sales of the new product
are expected to be 10,000 units this year and are expected to increase by 15% per year in
the future. What are the expected sales for the next 3 years?

3) The Lexington Property Development Company has a $10,000 note receivable from a
customer due in 3 years. How much is the note worth today if the interest rate is
a. 9% annual interest?
b. 12% compounded monthly?
c. 8% compounded quarterly?

4) What is the present value of a 10-year annuity that pays $1,000 annually, given a 10%
discount rate?

5) Determine the present value of an annuity due of $1,000 per year for 10 years discounted
at annual rate of 15%.

6) Upon graduating from college 35 years ago, Dr. Nick was already planning his
retirement. Since then, he has made deposits into a retirement fund on a quarterly basis in
the amount of $300. Nick has just completed his final payment and is at last ready to
retire. His retirement fund has earned 9% compounded quarterly. How much has Nick
accumulated in his retirement account?

7) You believe in the power of compounding and decide to save $1 per day by avoiding the
purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays
8% interest compounded daily. You are going to take a trip in 20 years with the money
you have accumulated. How much money will you have in 20 years, assuming 365 days
per year?
8) Your son will be attending an expensive university in 12 years. You deposit $5,000 per
year for 12 years, at the beginning of today’s period. How much money will be in the
college fund 12 years from now if the fund earns 8% per year?

9) John has obtained a grant of $600,000 for research at his university. He wishes to make
equal withdrawals at the end of each year for 4 years to pay the research assistants,
secretaries and for other expenses. If he places the cash in an account which pays 10%
interest compounded annually, how much must each withdrawal be so that no cash is left
at the end of the fourth year?

10) John and Mary are expecting to build a $250,000 nest egg to use to travel the world upon
retirement. They would like to know how much they need to set annually to reach this
goal. John indicates that they will retire 20 years from today while Mary thinks that a 6%
rate of return is appropriate for their risk level. Calculate how much they need to set
annually if they want to save at the beginning of each year.