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    Time Value of Mney

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    RafaelDelaCruz
    1. The document provides examples of time value of money calculations including compound interest, present value, loan payments, and rates of return. 2. It asks the reader to calculate future and present values for investments with varying interest rates, time periods, and payment amounts. 3. Several word problems are also included that require calculating internal rates of return for investments in land, art, and other assets over many decades.

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    Time Value of Mney

    Uploaded by

    RafaelDelaCruz
    365 views3 pages
    1. The document provides examples of time value of money calculations including compound interest, present value, loan payments, and rates of return. 2. It asks the reader to calculate future and present values for investments with varying interest rates, time periods, and payment amounts. 3. Several word problems are also included that require calculating internal rates of return for investments in land, art, and other assets over many decades.

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    1. The document provides examples of time value of money calculations including compound interest, present value, loan payments, and rates of return. 2. It asks the reader to calculate future and present values for investments with varying interest rates, time periods, and payment amounts. 3. Several word problems are also included that require calculating internal rates of return for investments in land, art, and other assets over many decades.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    365 views3 pages

    Time Value of Mney

    Uploaded by

    RafaelDelaCruz
    1. The document provides examples of time value of money calculations including compound interest, present value, loan payments, and rates of return. 2. It asks the reader to calculate future and present values for investments with varying interest rates, time periods, and payment amounts. 3. Several word problems are also included that require calculating internal rates of return for investments in land, art, and other assets over many decades.

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    Additional Exercise on Time Value of Money

    1. Find the values for the following:


    a. An initial $500 compounded for 1 year at 6 percent.
    b. An initial $500 compounded for 2 years at 6% percent.
    c. The present value of $500 due in 1 year at a discount rate of 6 percent.
    d. The present value of $500 due in 2 years at a discount rate of 6 percent.
    2. What is the monthly payment on a 5 year car loan for $14,000 at an annual interest rate of
    12%?
    3. Which grows to a larger future value, $1000 invested for 2 years at:
    a. 10 percent each year
    b. 5 percent the first year and 15 percent the second year or
    c. 15 percent the first year and 5 percent the second year?
    Explain your results.
    4. Which grows to a larger future value:
    a. $4000 invested for 10 years at 5% or
    b. $2000 invested for 10 years at 10%.
    5. Which is worth more at 10 percent, compounded annually:
    $1000 in hand today or $2,000 due in 5 years?
    6. A paper company invests $4m to clear a tract of land and plant some young pine trees. The
    trees will mature in 10 years, at which time the forest will have a market value of $8m. What is
    the expected rate of return for the paper company's investment?
    7. A 1987 advertisement in the New Yorker solicited offers on a 1967 Mercury Cougar XR7
    (Motor Trend's 1967 car of the year) that had been stored undriven in a climate controlled
    environment for 20 years. If the original owner paid $4000 for this car in 1967, what price would
    he have to receive in 1987 to obtain a 10 percent annual return on his investment?
    8. Vincent Van Gogh sold only one painting during his lifetime, for about $30. A sunflower still
    life he painted in 1888 sold for $39.85 million in 1988,, more than three times the highest price
    paid previously for any work of art. If this painting had been purchased for $30 in 1888 and sold
    in 1988 for $39.85 million, what would have been the annual rate of return?
    9. In 1940, your grandmother put $1000 into a special trust to be paid to a future grandchild
    (you) 60 years later, in the year 2000. How much will this trust be worth in the year 2000 if it has
    been earning 8%? How much if it earns 12%.

    10. A lottery jackpot of one million is paid out $25,000 a year for 40 years. At a 10 percent
    required return, what is the present value of this payoff? Assume that the first payment is paid
    immediately.
    11. At an interest rate of 10%, what is present value of $1m to be received in:
    a. 10 years
    b. 50 years
    c. 100 years
    d. 150 years
    12. You have been hired as a financial advisor to Michael Jordan. He has received two offers for
    playing professional basketball and wants to select the best offer, based on considerations of
    money only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a $11m offer of $1m
    a year for four years and $7m in year 5. What is your advice? (Hint: compare the present value of
    each contract by assuming a range of interest rate, say 8% - 14%)
    13. Assume it is now January 1, 2000, and someone offers the following deal: starting from year
    2000, you will be paid each year the amount of dollars equal to the year, i.e., $2000, $2001,
    $2002, .... until year 3000 inclusive. If payments occur at the year end and the interest rate
    remains at 10%, what is the PV of such a deal? What is the PV if the payments covers only the
    years from 2000 to 2050 inclusive? What can you conclude for the comparison?

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