MODULE 5 CT PROBLEMS THE TIME VALUE OF MONEY CT 5 - 1 Chapter 5 COMPOUND INTEREST To what amount will the following SAR investments accumulate? A) Investment 5,200 Years 4 Percent 7% FV = B) Investment 7,500 Years 2 Percent 9% FV = C) Investment 20,500 Years 7 Percent 10% FV = D) Investment 800 Years 20 Percent 6% FV = CT 5 - 2 PRESENT VALUE What is the present value of the following future amounts? Chapter 5 A) FV Years Percent PV = B) FV Years Percent PV = C) FV Years Percent PV = D) FV Years Percent PV = 10,500 5 12% 7,550 4 7.50% 2,300 5 10% 4,015 8 14% CT 5 - 3 Chapter 5 FUTURE VALUE Sales of a new business book were 25,500 copies this year and were expected to increase by 12% per year. What are expected sales during each of the next 3 years? DATA Copies 25,500 Percent 12% Years' 3 FV for 1st yr = FV for 2nd yr = FV for 3rd yr = CT 5 - 4 Chapter 5 PRESENT-VALUE COMPARISON Assuming you can earn 6 percent on your money, which of the following offers should your choose? SAR 6,000 today; SAR 12,000 in 12 years; or SAR 22,000 in 21 years Percent Years Amount PV A Today 6,000 B 13 12,000 C 21 22,000 Which offer should you choose and why? CT 5 - 5 Chapter 5 COMPOUND ANNUITY What is the accumulated sum of each of the following streams of payments? a. SAR 1,500 a year for 3 years compounded annually at 7 percent b. SAR 1,400 a year for 4 years compounded annually at 8 percent c. SAR 1,300 a year for 3 years compounded annually at 9 percent d. SAR 1,200 a year for 6 years compounded annually at 10 percent A) Pymt Years Percent FV = B) Pymt 1,500 3 7% 1,400 Years Percent FV = C) Pymt Years Percent FV = D) Pymt Years Percent FV = 4 8% 1,300 5 9% 1,200 6 10% CT 5 - 6 Chapter 5 COMPOUND INTEREST WITH NONANNUAL PERIODS a. Calculate the future sum of SAR 12,000, given that the money will be held in the bank for 5 years at an annual interest rate of 8 percent. b. Recalculate part a. assuming the interest rate is (1) compounded semiannually and (2) compounded quarterly. c.Recalculate parts a. and b. for an APR of 12 percent d. Recalculate part a. using a time horizon of 10 years (the APR is still 8 percent) e. With respect to the effect of changes in the stated interest rate and holding periods on future sums in parts c. and d., what conclusions do you draw when you compare these figures with the answers found in parts a. and b.? A) PV 12,000 Years 5 Percent 8% FV = B) Semiannual Quarterly C) Rate Annual Semiannual Quarterly D) Years Annual E) 12% 10