Problem Assignment: Time Value of Money
Use Excel Functions to correctly calculate answers to all problems below
Explain in words what you do to make each calculation
Explain in words what the answers mean
In problems with an A and B part, explain what you learn from the difference
1
If you deposit $20,000 today in a Certificate of Deposit and earn 3% annual interest,
how much will you have in 8 years?
Answer:
2
$4,444.98
25.55 years
10.0%
Point Value
5.0%
Point Value
10.0%
-$1,077.71
Point Value
7.5%
Point Value
10.0%
9.42%
Point Value
7.5%
For the year that ended in January 2000, Wal-Mart had revenues of $165 billion. For the year
ended in January 2012, it had revenues of $447 billion. What has been the average
compound growth rate?
8.66%
Point Value
7.5%
Deniece has accumulated $50,000 in her thrift savings plan at her job at the Federal Aviation
Administration. The government puts in 1% of her pay and matches up to another 4% if she
puts in 5% out of her pay. Deniece earns $80,000 a year and plans to add 5% from her
income plus the agency 5% for a total of $8,000 per year. Her cousin Eugene says that if she
invests in stocks, she can earn 12% per year because that has been the long term history.
How much will she have in 25 years at retirement if she can earn 12% per year compounded
annually?
Answer:
8b
Point Value
Tim paid $250 per month into his 401K retirement plan. After 30 years, he had accumulated
$500,000. What average annual rate of interest had he earned over the 30 years?
Answer:
8a
5.0%
Mrs. Woods sees an advertisement for a 15 year loan at a rate of 2.75%. What would be the
mortgage payment if they borrow $240,000 at this lower interest rate?
Answer:
7
Point Value
The Woods have $60,000 to use as a down-payment on a house, and they want to borrow
$240,000 to buy a house for $300,000. The current annual mortgage interest rate is 3.5%.
What will their monthly payment be for a 30 year loan that has equal monthly payments. They
will owe zero at the end of the mortgage.
Answer: You calculate
6
5.0%
How long will it take to triple your money at 2.75%?
Answer:
5b
Point Value
You deposit $5,000 into an IRA account that invests in long term U S Treasury Bonds. Current
Interest rates for the 20 year bond are 2.75%. How long will it take to double your money?
Answer: You calculate
5a
5.0%
If Interest rates rise to 6%, what will be the value today of the annuity in 3 a?
Answer:
4b
Point Value
$459,801.14
Answer: You calculate
4a
Point Value
Liz received a life insurance payout from her grandmother in the form of an annuity.
She will get $25,000 per year for the next 30 years. How much is that worth today if
the current long term interest rate is 3.5%? This is an ordinary annuity.
Answer:
3b
Point Value
Melanie will receive a graduation gift of $5,000 from her parents in 3 years. If the
discount rate is 4%, what is the gift worth today?
Answer:
3a
$25,335.40
$1,916,674.18
Point Value
Deniece’s friend Marshall heard a speech by John C. (Jack) Bogle, founder of The Vanguard
Group of Mutual Funds, one of the lowest cost and most successful group of funds. Jack said
that with the increasing need to reduce carbon emissions, it is unlikely that long term stock
returns can exceed 6% per year. Steps to reduce carbon will likely reduce prospects for
7.5%
economic growth in Mr. Bogle’s opinion. How much will Deniece have if Jack Bogle is correct
and the earnings will be 6% per year compounded annually?
Answer: You calculate
Point Value
10.0%
9 Christina hopes to open a Deli in 2015. The initial investment will be $85,000. She expects that that the Deli
will generate the positive cash flow as indicated below. If she can borrow money at 7% per year, what will be
the Net Present Value? Use 7% as the discount rate.
Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
Cash Flow
$22,000
$24,000
$29,000
$30,000
$31,000
$27,000
$22,000
$15,000
$12,000
Answer:
$72,134.42
Be sure to explain what you do in words.
Also, tell what the answer means.
In problems with both part a and part b, compare the two answers.
In each case, you should be able to do part b if you can do part a.
Please send an e-mail with questions to me or to our T/A.
First try, then reach out. Do not suffer in silence
Point Value
Total
10.0%
100.0%
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